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Abstract:
This paper presents a cash flow based analysis of the return and risk characteristics of European Private Equity Funds. For that purpose a comprehensive data set has been provided by Thomson Venture Economics. We document the typical time pattern of cash flows for European private equity funds. Specifically, it is recorded that the average European private equity fund draws down 23% of total committed capital on the vintage date; within the first three years 60% of the total commitment is draw down. It turned out that limited partners on average get back the money invested slightly after 7 years.

Over the time period from 1980 to June 2003, we calculate various performance measures. For that purpose we use only liquidated funds or funds with a small residual net asset value. Under this restriction one specific data set consists of 200 funds. We document a cash flow based IRR of 12.7% and an average excess-IRR of 4.5% relative to the MSCI Europe equity index. In order to circumvent the problems associated with the IRR-approach we focus on the alternative public market equivalent approach. There it is assumed that cash flows generated by a private equity fund are reinvested in a public market benchmark index. We record an average PME of 0.96 and a value-weighted average PME of 1.04.

Based on the PME-approach we develop a viable methodology to estimate the return and risk characteristics of European private equity funds and the correlation structure to public markets. As a benchmark index we used the MSCI Europe Equity Index as well as the J.P. Morgan Government Bond Index. Over the period 1980-2003 private equity funds generated an overperformance with respect to the bond index and two of our three samples an underperformance with respect to the equity index. Over the period 1989-2003 private equity funds generated an overperformance with respect to both indexes.

Finally, we analyze to what extent performance measures are associated with specific funds characteristics, like size, payback period and vintage year, respectively. While the payback period and the vintage year seem to have a statistically significant influence on a fund's performance, the results with respect to size are inconclusive.

Private equity, venture capital, cash flow analysis, public market

Abstract:
Private equity funds and hedge funds are both alternative asset classes that are continuously growing in importance. Although they have different focuses, they share some characteristics. First of all, both have or allegedly have a significant impact on the economy as well as the financial system they operate in. Therefore, the question of a potential regulation of both asset classes arises. Due to the lack of sophisticated knowledge about the differences of these asset classes, market players fear that attempts to regulate hedge funds will adversely affect private equity funds. Besides the regulatory issue, there are several other links between these two asset classes that have to be looked at. The relationship between those two asset classes is therefore of general importance.

Last months‘ developments in the hedge fund industry (e.g. rumors about turbulences as well as hedge funds forcing the dismissal of the CEO of Deutsche Börse) have now even led to a broad public debate about private equity and hedge funds. At least in Germany the debate has been partly fueled by the fact that both types of funds are highly funded by institutional investors from abroad. Due to this the debate widened and included criticism on Anglo-Saxon style capitalism as well. In the light of the last German elections, hedge funds and private equity funds have even been compared to locusts, notorious for exhausting whole countries. However, the distinction between hedge funds and private equity funds remains very vague in this discussion, so that deep mistrust is spread among the public opinion against these new, mostly unknown and misunderstood types of investors.

For this reason it is important to
* discuss the arguments for or against regulation,
* look at the major links between the two asset classes,
* look at the major differences that exist between the asset classes, and
* conceive a set of criteria to clearly distinguish between both types of funds.

The purpose of this paper is to comment on possible solutions to the above mentioned tasks. It outlines preliminary thoughts and findings. Further, it comments on the steps that we think should be taken to further enhance perception of private equity funds as opposed to hedge funds from a public as well as a regulatory perspective.

Private Equity Funds, Hedge Funds

Abstract:
Market liquidity risk, the difficulty or cost of trading assets in crises, has been recognized as an important factor in risk management. Literature has already proposed several models to include liquidity risk in the standard Value-at-Risk framework. While theoretical comparisons between those models have been conducted, their empirical performance has never been benchmarked. This paper performs comparative back-tests of daily risk forecasts for a large selection of traceable liquidity risk models. In a 5.5 year stock sample we show which model provides most accurate results and provide detailed recommendations which model is most suitable in a specific situation.

Asset liquidity, liquidity cost, price impact, Xetra liquidity measure (XLM), risk measurement, Value-at-Risk, market liquidity risk

Abstract:
This paper analyzes the determinants of returns generated by private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. As a consequence, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry giving way to the so called 'money chasing deals' phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of variation in private equity funds' returns. This is especially true for venture funds, as they are more affected by illiquidity and segmentation than buy-out funds. Actually, the paper presents a WLS-regression approach that is able to explain up to 47% of variation in funds' returns. Apart from the highly significant impact of fund inflows into the industry, it can also be shown that private equity funds' returns are driven by market sentiment, GP's skills as well as stand-alone investment risk. Moreover, returns seem to be unrelated to stock market returns and negatively correlated with the growth rate of the economy. In the context of a bootstrapping inference we can show that most of these results are quite stable.

Private equity funds, performance, venture capital, buyout

Abstract:
This paper analyzes the determinants of returns generated by European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness and segmentation. As a consequence, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry giving way to the so called 'money chasing deals' phenomenon. It is the aim of this paper to document that this phenomenon also explains a significant part of variation in private equity funds' returns. This is especially true for venture funds, as they are more affected by illiquidity and segmentation than buy-out funds. Actually, the paper presents a WLS-regression model that is able to explain up to 47% of variation in funds' returns. Apart from the importance of fund flows we can also show that market sentiment, the GPs' skills as well as the idiosyncratic risk of a fund have a significant impact on its returns. Moreover, they seem to be unrelated to stock market returns and negatively correlated with the development of the economy as a whole. According to a bootstrapping inference the results seem to be quite stable.

Private equity funds, venture capital, financing, WLS, bootstrapping

Abstract:
In this paper we address the question whether insider ownership affects
corporate performance. Evidence from studies dealing with Anglo-Saxon
countries is rather inconclusive, especially because results seem to be significantly affected by endogeneity. Economically, this is due to the fact that in these countries insider ownership seems to be mainly driven by management's compensation contracts. We argue that Germany is different in this regard, as insider ownership is often related to family control, stock-based compensation is less widespread, and the market for corporate control used to be less developed. Starting from this presumption, our data allows an unbiased observation as to whether insider ownership affects firm performance. Using a pooled data set of 648 firm observations for the years 2003 and 1998, we find evidence for a positive and significant relationship between corporate performance - as measured by stock price performance, market-to-book ratio and return on assets - and insider ownership. This relationship seems to be rather robust, even if we account for potential endogeneity by applying a 2SLS regression approach. Furthermore, the results hold for a sub-sample of firms that did not have a stock-based compensation program in place. Moreover, we find outside block ownership as well as more concentrated insider ownership to have a positive impact on corporate performance. Overall, the results indicate that ownership structure might be an important variable explaining the long term value creation in the corporate sector.

Ownership Structure, Shareholder Structure, Insider Ownership, Firm Performance, Corporate Governance, Agency Costs

Abstract:
Market liquidity is the ease of trading an asset. Its risk is the potential loss, because a security can only be traded at high or prohibitive costs. While the omnipresence and importance of market liquidity is widely acknowledged, it has long remained a more or less elusive concept. Treatment of liquidity risk is still under development.

This paper provides an overview on important aspects of market liquidity and its risk. We also survey existing models to integrate market liquidity risk into risk frameworks. We place special emphasis on practical usability and discuss relevant strengths, weaknesses and their implications.

Asset liquidity, liquidity cost, price impact, Xetra liquidity measure (XLM), risk measurement, Value-at-Risk, market liquidity risk, overview

Abstract:
We propose a new approach to estimate the equity premium using CDS spreads and structural models of default. Our estimates yield equity premia of 6.50% for the U.S., 5.44% for Europe and 6.21% for Asia based on 5-year CDS spreads from 2003-2007. Due to some conservative assumptions these estimates are upper limits for the equity premium. Using 3-, 7- and 10-year CDS maturities yields similar results and offers an opportunity to estimate the term structure of risk premia. Although our estimator is developed in a Merton framework it is robust with respect to model changes. In fact, we obtain similar results when extending the approach to a first-passage-time framework, strategic default frameworks or a framework with unobservable asset values (Duffie/Lando (2001)).

credit risk premim, equity premium, market sharpe ratio, credit risk, structural models of default

Abstract:
We integrate liquidity risk measured by the weighted spread into a Value-at-Risk (VaR) framework. The weighted spread measure extracts liquidity costs by order size from the limit order book. We show that it is precise from a risk perspective in a wide range of clearly defined situations.

Using a unique, representative data set provided by Deutsche Boerse AG, we find liquidity risk to increase traditionally-measured price risk by over 25%, even at standard 10-day horizons and for liquid DAX stocks. We also show that the common approach of simply adding liquidity risk to price risk substantially overestimates total risk because correlation between liquidity and price is neglected. Our results are robust with respect to changes in risk measure, to sample periods and to effects of portfolio diversification.

Asset liquidity, price impact, weighted spread, Xetra Liquidity Measure (XLM), Value-at-Risk, market liquidity risk

Abstract:
The presented paper addresses the question whether there is a stock price reaction to index replacements on the German stock market. Although it is well known from the empirical literature, which is predominantly related to the US stock market, that an index replacement has a strong impact on stock prices, it is still an open question, whether this stock price adjustment is only transitory or persistent.

In order to shed new light on this issue, this paper analysed inclusions into and deletions from the two most important German stock indexes, namely the blue-chip index DAX and the mid-cap index MDAX. Unfortunately, also our evidence seems to be rather mixed with respect to the above mentioned hypotheses. We found a strong abnormal price impact on the day of the announcement of the index replacement. Stocks included in the index rose by 1.72 percent on the announcement date, while stocks deleted form the index fall by 1.19 percent on that day and by a further significant 8.76 percent up to the replacement day. Both reactions were statistically significant and they seem to be persistent, as we found no indication for a reversion in the stock price movement during the following weeks. This evidence does not fit into the price pressure hypothesis. The same is true for our finding that although absolute price reactions on the announcement date are very similar for both type of index replacements abnormal trading volume reactions are larger and more significant for index inclusions. We also found some evidence against the liquidity hypothesis. Especially, an index replacement seems not to have an impact on stock price volatility and price reactions on the announcement date are not correlated with long run volume reactions. Therefore, our evidence may support the imperfect substitute hypothesis, although we found a weakly significant correlation of price and volume reactions on the announcement date only for inclusions. Of course, the economically interesting question remains why investors and fund managers are willing to pay a premium for stocks included in an index.

Abstract:
This paper is focused on the cost of raising capital in Germany. It challenges the conventional wisdom that external financing technology is characterized by economies of scale and, hence, marginal external financing costs are decreasing. In order to achieve this goal, a cross-sectional analysis of flotation cost data for 117 IPOs on the German capital market over the years 1993-1998 has been carried out. By applying a principal component analysis within a generalized weighted least squares framework we will be able to test different specifications for an average underwriting fees and non underwriting costs function.

First of all, it may be interesting to see that average total flotation costs in Germany amount to 7.77 percent (median 7.30 percent) of gross proceeds, while average underwriting fees amount to 5.01 percent (median 5.00 percent). These figures seem to be relatively low compared with available results for other countries.

As far as flotation cost structure is concerned, we find issue size as well as issuer risk and offering method complexity to have an economically meaningful and significant impact on average underwriting fees. Moreover, we do not find support for economies of scale in external financing activities in the sense that, other things equal, marginal spreads seem rather to be constant in gross proceeds. Hence, marginal costs of raising equity capital seem not to be decreasing. In addition, we found them to be higher for more riskier and more complex offerings. This corroborates the view that offerings which are likely to require greater underwriting services encounter higher marginal spreads.

Finally, fixed costs account on average only for 5 to 9 percent of underwriting fees, but for 52 to 63 percent of non underwriting costs. Hence, due to the moderate relative size of non underwriting fees also average fees seem to be rather constant. This is why in our view it is unlikely that external financing costs have a significant impact on optimal firm size.

Abstract:
This paper is focused on the cost of raising equity capital in Germany. It challenges the conventional wisdom that underwriting business is characterized by an economies of scale technology and, hence, marginal external financing costs are ever decreasing. In order to achieve this goal, different specifications for an average flotation cost and underwriting fees function were tested on the basis of a cross-sectional analysis of 120 SEOs on the German capital market over the years 1993-1998. Some of these specifications turned out to have considerable explanatory power.

As a first result, it is interesting to see that average total flotation costs in Germany amount to 1.61 percent of gross proceeds, while average underwriting fees are about 1.32 percent. As usual, average flotation costs are lower for large sized issues compared with small sized issues.

However, as far as the economies of scale view for single issues is concerned, a careful analysis will show that ever decreasing marginal flotation costs seem to be very unlikely. This means that, other things equal, marginal spreads seem rather to be constant or even U-shaped in gross proceeds. Moreover, fixed costs seem not to be very high in that they account on average for not more than 14 to 29 percent of total flotation costs or total underwriting fees, respectively. For medium and large sized issues this average is below 10 percent. Finally, we do not find support for economies of scale at the industry level. Indeed, other things equal, small market participants were found to be able to offer underwriting services at competitive prices, at least for issues within smaller size brackets.

Flotation, Raising Capital, Equity Financing, Seasoned Equity Offerings, Investment Banking, Underwriting Fees, Economies Of Scale, Cross-Section Analysis

Abstract:
It is well-known from US-related studies that investors systematically overreact to accrual-based accounting information. We address the question to what extent this accrual anomaly is related to different accounting standards. We provide empirical evidence that the accrual anomaly is also present in Germany. However, this anomaly has become particularly important after the year 2000 and cannot be detected for firms presenting their financial statements under German GAAP. It is argued that introducing true and fair view accounting, like IFRS, that relies on difficult-to-verify information, may not be suitable to improve accounting information quality in the context of a weak corporate governance system.

accrual anomaly, earnings persistency, conservative accounting, true and fair view accounting, accounting standards, accounting regulation, empirical accounting research, German GAAP, IFRS/IAS, US-GAAP

Abstract:
It has been frequently discussed, that returns are not normally distributed. Liquidity costs, measuring market liquidity, are similarly non-normally distributed displaying fat tails and skewness. Liquidity risk models either ignore this fact or use the historical distribution to empirically estimate worst losses. We suggest a new and easily implementable, parametric approach based on the Cornish-Fisher approximation to account for non-normality in liquidity risk. We show how to implement this methodology in a large sample of stocks and provide evidence that it produces much more accurate results than an alternative empirical risk estimation.

Asset liquidity, liquidity cost, market liquidity risk, non-normality, modified Value-at-Risk, Cornish-Fisher expansion

Abstract:
There is an ongoing debate in the literature whether the positive stock price effects to the announcement of a dividend increase or a share repurchase should be explained by the information-signalling hypothesis or the managerial discretion hypothesis of by both of them. We propose a new study where the relevance of the managerial discretion hypothesis in explaining stock market reactions to pay-out announcements could be directly tested. For that purpose we analyse the announcement effects of one-time dividend payments by listed German companies. These dividends were paid in order to realise a tax saving opportunity for the shareholders caused by a revision of the German tax code. As the firms did no have much discretion in timing the disbursement, the event by itself should not have any informational impact. It will be shown that over a period of %B1 3 months around the announcement date the abnormal stock price effect is 3.4 to 4.6 times as high as the mere tax saving effect induced by the one-time dividend payment. Moreover, according to the managerial discretion hypothesis we find the stock price effect to be significantly lower for those companies generating the tax saving without paying out cash to shareholders.

Abstract:
We analyse whether family firms differ from non-family firms in terms of business segment and geographical diversification or the application of currency hedging instruments. This analysis is based on a unique dataset of 339 publicly listed companies (1,561 firm years) in the German Prime Standard from 2002 to 2006. While there is widespread empirical evidence on differences between family and non-family firms in terms of corporate performance, comparatively little is known about the impact of family firm dimensions on firm behaviour. We try to fill this research gap with a single country study focusing on Germany, an economy where family-control traditionally plays a predominant role in corporate governance.

We find that family firms are less diversified in unrelated business segments. However, there are no differences between family firms and non-family firms in terms of overall and related business segment diversification. For geographical diversification, we do not find convincing evidence for any differences. Finally, our analysis indicates that family firms are less likely to use currency hedging instruments.

In a second step, we go beyond existing research and distinguish between two separate dimensions of family firms: family management and family ownership. Empirical results indicate that those two dimensions have conflictive effects on firm behaviour. Family management, i.e. the involvement of the founding family into firm management, reduces agency costs and thus leads to lower levels of business segment diversification and less currency hedging. In contrast family ownership leads to risk aversion and more business segment diversification. Overall, the family management aspect is more likely to dominate the family ownership aspect.

Family firms, family ownership, family management, risk management, risk aversion, agency costs, diversification, derivatives, hedging, corporate governance

Abstract:
In this paper we examine potential structural changes in the setup of executive payment schemes in Germany during the 1990 to 2002 period. Given substantial changes in corporate governance during this period, our initial hypothesis is that executive pay in later periods shows a stronger relation with firm performance than it was the case in the early 1990s. However, empirical evidence based on 1990 to 1993 versus 1998 to 2002 data does not support this hypothesis. Regression results based on a WLS-WITHIN estimator explain up to 90 percent of the variability of normalized executive pay while the relation with measures of firm performance rather weakens for the later period. Normalized executive pay significantly increases with free float. Also, a substantial increase in payments during the 1990s, which amounts to a 47 percent increase on average, is higher for companies with larger free float. We additionally find that German companies which obtained a U.S. listing show higher increases in normalized payments. Our overall evidence is consistent with the hypothesis that executive payment decisions may result under deficient mechanisms of corporate control.

Executive pay, free float, corporate control

Abstract:
Due to the recent emergence of secondary markets and securitisation for limited partnership shares, interest in valuation and risk modeling for private equity funds is increasingly gaining momentum. In this paper, we present a new continuous-time approach for valuing private equity investments based on a stochastic model of the cash flow dynamics of a private equity fund. Our stochastic model of a private equity fund consists of two independent stages: the stochastic model of the capital drawdowns and the stochastic model of the capital distributions over a fund's lifetime. A mean-reverting square-root process is applied to model the rate at which capital is drawn over time. Capital distributions are assumed to follow an arithmetic Brownian Motion with a time-dependent drift component. Applying equilibrium intertemporal asset pricing considerations, we are able to derive a closed-form solution for the market value of a private equity fund. This model market value is also used to explore the dynamics of the expected return and systematic risk of a fund over its lifetime. Our analysis shades light on some deficiencies of recent empirical studies on the risk and return of private equity funds, as it reveals that the systematic risk of a private equity fund will, in general, be time-dependent. Furthermore, we show how our model can be calibrated to cash flow data from real private equity funds and perform various consistency tests to illustrate the goodness of fit of our model with empirical data.

Private Equity Funds, Stochastic Modeling, Mean-Reverting Square-Root

Abstract:
This study examines how family firm characteristics affect capital structure decisions. In our analysis we disentangle the influence of three distinct components of a family firm: ownership, supervisory and management board activities by the founding family. Thereby, we use a unique panel dataset of 660 publicly listed companies (5,135 firm years) in the broadest German stock index CDAX from 1995 to 2006. This paper is motivated by hitherto inconclusive empirical findings on capital structure decisions in family firms from Anglo-Saxon countries. We provide new evidence for a bank-based economy. In this sense, Germany provides a very fruitful research environment as it (i) traditionally has a bank-based financial system and (ii) family firms are considered to be the backbone of the economy.

We find that family firms have significantly lower leverage ratios than non-family firms, independent of the definition of leverage applied. Among the three dimensions of a family firm, management board involvement by the founding family has a consistently negative influence on leverage across all our models. In contrast, the influence of ownership and supervisory board representation is insignificant in almost all of our models. In line with agency theory, we can show that the leverage level is the lowest if the founding family is simultaneously a large shareholder with monitoring incentives and involved in firm management with convergence-of-interest effects. Finally, we detect that the presence of a founder CEO in firm management has a significant negative effect on the leverage ratio. Our results prove to be stable against a battery of robustness tests including a matching estimator technique to demonstrate causal effects.

Family firms, family ownership, family management, founder CEO, agency costs, capital structure, debt-equity ratio, leverage, corporate governance, risk aversion

Abstract:
Family firms are an important phenomenon of the German capital market. We analyse the broadest market segment of the German Stock Exchange, the CDAX, for the years 1998 to 2008. According to a founding-family definition almost half of all CDAX-listed non-financial firms in Germany can be classified as family firms. They also represent about one third of all listed non-financial firms' market capitalization. Within these firms the founding family is not only the most important shareholder but also participates actively in most of the boards (management and supervisory board). In about 50% of all family firms the founder also serves as CEO. Family firms are smaller, younger and have higher equity ratios compared to their non-family counterparts. They are represented in all industries with a certain concentration in the services sectors. We confirm and extend previous evidence by Jaskiewicz (2006) and Andres (2008) that family ownership and management has a positive impact on a firm's operating performance. Our analysis of stock market performance provides evidence that family firms are more sensitive to market movements compared to non-family firms.

family firms, Germany, performance

Abstract:
This paper is focused on the cost of raising equity capital in Switzerland. In the spirit of the papers of ALTINKILIC/HANSEN (2000) and BUHNER/KASERER (2002) we analyze the structure of the flotation cost function for listed firms in Switzerland. For a sample of 74 SEOs on the Swiss capital market over the years 1996-2003 it is found that the direct flotation cost spreads averages 4.53 percent of gross proceeds. On an international basis this figure is rather high. Moreover, by applying a cross-sectional regression technique we are able to explain more than 50% of flotation cost variance. As far as the economies of scale view is concerned, we find clear evidence in favor of diseconomies of scale.

Abstract:
This paper is focused on the cost of raising equity capital in Switzerland. In the spirit of the papers of Altinkilic and Hansen (2000) and Buehner and Kaserer (2002) we analyze the structure of the flotation cost function for listed firms in Switzerland. For a sample of 45 SEOs on the Swiss capital market over the years 1996-2000 it is found that the direct flotation cost spreads averages 4.26 percent of gross proceeds. Compared with results related to the German or French capital market this figure is surprisingly high. Moreover, we develop empirically a flotation cost function. On the basis of this analysis it turns out that flotation costs are lower if the issuer opts for self-registration, the issue is less complex, the offer price discount is higher and the stock's market risk is lower.

As far as the economies of scale view is concerned, we find clear evidence in favor of diseconomies of scale. In fact, marginal flotation costs are weakly increasing in gross proceeds and, moreover, no supporting evidence for the existence of a fixed cost component in flotation costs can be found. To our understanding this is an important additional piece of evidence against the conventional wisdom that underwriting technology is governed by economies of scale.

flotation costs, raising capital, equity financing, seasoned equity offerings, investment banking, underwriting fees, economies of scale, cross-section analysis

Abstract:
Recently, some European Union member states implemented corporate tax rules restricting the deductibility of interest payments. Most prominently, Denmark extended its thin capitalization rule by an interest stripping rule restricting a firm's interest deductions to 80 percent of EBIT. Similar rules have been introduced in Germany and Italy since the beginning of the year 2008. This paper discusses the economic impact of an interest stripping rule in the context of the European system of corporate taxation. Among others it is argued that impact on cost of capital will be highest for those firms that have little ability to reduce their debt exposure because of equity-rationing. This is most likely the case for SMEs. Large multinational firms could mitigate the effect of the interest stripping rule by substituting debt with equity.

Highly leveraged firms will also clearly be hit by the interest stripping rule. This is typically the case for private equity backed firms. However, it should be noted that the economic burden of this rule is borne by the national economy and not by the private equity investor. The latter will simply reduce the purchase price for new acquisitions in order to offset the negative impact of the interest stripping rule. On the markets, however, company values will decrease.

Interest stripping rule, thin capitalization rule, corporate tax system

Abstract:
Liquidity, the ease of trading an asset, strongly varies between different sizes of stock positions. We analyze this aspect using the Xetra Liquidity Measure (XLM), which calculates daily, weighted spread for impatient traders transacting against the limit order book. For this measure, we have data for 160 German stocks over 5.5 years, which allows us a representative analysis of the order-size impact on liquidity cost and its main statistical characteristics.

We find that in the sample period average liquidity costs rose to over 100bp in large DAX and to 460bp in large SDAX positions. Over the last 5.5 years, liquidity has equally improved across all order sizes. Liquid position sizes, however, suffered less badly during the recent sub-prime crises, which represents another type of the flight-to-liquidity.

As the basis for further theoretical analysis, we find that trends in liquidity levels and inefficiencies in liquidity prices of large positions generate non-normality in the liquidity distribution. We also show that - as a rule of thumb - liquidity of an order size relative to market value and transaction volume is constant across stocks and time. While order size is not the most important liquidity determinant, doubling order size increases liquidity cost by 5-10% on average when accounting for other differences in stocks.

Asset liquidity, liquidity cost, price impact, weighted spread, Xetra liquidity measure (XLM)

Abstract:
This paper examines the impact of SOX on the total cost and the component cost of going public. First, we document a statistically significant increase in non-underwriting expenses of 0.8 percentage points after the introduction of SOX, which is mostly due to an increase in accounting and legal fees. Because of the fixed-cost character of this component cost, smaller issues show a much greater percentage increase than larger ones. Second, we demonstrate a highly significant reduction in underpricing in the magnitude of about 4 percentage points. This result is size-independent, and in accordance with the view that SOX reduces adverse selection costs. Third, we find that on average the total flotation costs have decreased between 3 and 3.5 percentage points in the post-SOX period. However, for smaller companies the reduction in underpricing does not compensate anymore for the increase in non-underwriting expenses (i.e., accounting and legal fees). Therefore, the positive impact of SOX on the costs of going public decreases with smaller offering sizes.

Sarbanes-Oxley, SOX, IPO, Going Public, Adverse Selection

Abstract:
Insider trading studies related to the German market have emphasized that outside investors may earn excess returns by mimicking the transactions of corporate directors. Such a result, provided that it holds, would constitute a serious violation of the efficient market hypothesis. The results presented in this paper, though, show that this anomaly is mainly caused by a subset of stocks with high arbitrage risk as measured by their idiosyncratic volatility. This restrains arbitrageurs from engaging in otherwise profitable and price-correcting trades. As arbitrage risk is positively related to a stock's bid/ask-spread, we show that the information conveyed by insider trades cannot be exploited in terms of generating abnormal returns once these transaction costs are taken into account. We conclude that the market's under-reaction to reported insider trades can mainly be explained by the cost associated with risky arbitrage. Our findings provide evidence that the German stock market is efficient with respect to insider trades in the sense that prices reflect publicly available information to the point where the marginal benefit of acting on information exceeds marginal costs.

Insider Trading, Directors' Dealings, Arbitrage Risk, Market Efficiency

Abstract:
We analyse to what extent the accrual anomaly is related to the choice of the accounting system as well as firm-level heterogeneity in corporate governance mechanisms. Using a unique dataset of listed German firms over the period 1995 to 2005 we first corroborate former results indicating that the accrual anomaly is also present in Germany. However, this anomaly seems to be driven mainly by firms with managerial ownership. In a second step, we test how different corporate governance mechanisms affect the anomaly. For the German experiment on voluntary adoption of IFRS our results confirm previous findings that the anomaly is less likely to be present under a conservative accounting system. While creditor monitoring is able to reduce the accrual anomaly, shareholder monitoring is not. Apart from offering evidence related to the cross-sectional difference in the degree of accrual mispricing, our results give also some insights related to the cross-country variation of this phenomenon.

Accrual Anomaly, Earnings Quality, Corporate Governance, Managerial Ownership, Capital Market Efficiency, Accounting Standard, Shareholder Monitoring, Creditor Monitoring

Abstract:
True and fair view accounting standards are commonly considered to be the main driver of high accounting quality (i.e. Levitt, 1998). However, previous studies have found that high quality standards are a necessary but not a sufficient condition for high quality financial reporting (i.e. Ball et al. 2003; Leuz et al., 2003; Van Tendeloo/Vanstraelen, 2005). Germany provides an ideal natural experiment to examine whether incentives or standards drive earnings quality in a bank-based economy. This paper contributes to the actual discussion on accounting harmonization in several ways. Using a sample of listed German firms in the period from 1998 to 2008, this is the first study that analyses effects of ownership structures on the decision to voluntarily adopt IFRS. We show that the possibility to access company information via private information channels determined voluntary IFRS adoption and that IFRS did not overcome equity home bias in Germany. Our analysis of changes in earnings quality between the pre and the post adoption period shows that earnings quality mainly improved for voluntary but not for mandatory IFRS adopters. Analysing this phenomenon from a corporate governance perspective provides evidence that the aim to reduce insider ownership is one of the incentives to voluntarily adopt IFRS and thereby improve earnings quality under voluntary IFRS adoption. This is consistent with previous evidence that not standards per se but incentives are main drivers of accounting quality.

IAS regulation, IFRS, corporate ownership structures, insider ownership, incentives, earnings quality

Abstract:
Entrepreneurship education plays a crucial role in shaping the attitudes of students towards entrepreneurship as well as spurring the creation of future young companies. It is a crucial topic in any economy and increasingly becoming key on the agenda for universities around the world.

In this study, we took a look at the higher education entrepreneurship education landscape in German-speaking Europe. We have reviewed all universities, including the technical ones, across Germany, Austria, Liechtenstein and German-speaking Switzerland, using a broad definition of entrepreneurship. Our goal was to capture information about all entrepreneurship related activities, not just those labelled entrepreneurship. In this work, we focused on the entrepreneurship and related chairs, which are key hubs for providing teaching, generating research, launching activities and raising awareness.

Education, Entrepreneurship, Entrepreneurship Education

Abstract:
This paper investigates determinants and consequences of net asset value discounts in listed private equity funds. Listed private equity funds share characteristics of closed-end mutual funds and traditional unlisted private equity funds and can therefore offer insights into both. Our results have particular relevance to the pricing of unlisted private equity funds, where no market prices are observable. We find funds to start at an initial premium of -2.5 % and adapt to the long-term average of -21 % after two years. Fund returns display a new and puzzling U-shaped seasonality and an exceptionally weak stock performance in buyout funds after their initial public offering. Premia predict future returns and are explained by liquidity but not by investor sentiment or the fund's investment degree. Private equity fund premia seem to depend on credit markets and systematic risk. This relation suggests that some information about the fund's portfolio is not reflected in net asset values.

Listed Private Equity, Private Equity, Venture Capital, Net Asset Value, Book-to-Market Ratio, Closed-end Fund Discount

Abstract:
This paper examines the impact of SOX on the pricing of IPOs in the US. SOX represents a legal framework intended to increase transparency, reliability and accountability of listed companies. Therefore, we hypothesize that SOX via reducing asymmetric information has a dampening effect on IPO underpricing. In fact, as a first result we show that the level of offer price adjustments has significantly decreased after the introduction of SOX. Second, we record a highly significant reduction in underpricing. Third, we find that after the introduction of SOX, the reduction in underpricing can be fully explained by the adjustments made to the offer price. Therefore, the reduction in underpricing is the result of lower adjustments made to the offer price. By applying a propensity score matching approach we can show that our results are robust with respect to self-selection issues. Our findings provide further insights concerning the effects of SOX on the capital market. Furthermore, we extend the empirical evidence concerning the partial adjustment phenomenon.

Asymmetric information, bookbuilding, IPO, offer price adjustment, partial adjustment phenomenon, propensity score matching, selection bias, SOX, underpricing

Abstract:
This paper is focused on the cost of raising equity capital in Germany. In the spirit of Altinkilic and Hansen (2000) it challenges the conventional wisdom that flotation costs are characterised by economies of scale. For a sample of 120 SEOs on the German capital market over the years 1993-98 it is found that average total flotation costs amount to 1.61% of gross proceeds, while average underwriting fees are about 1.32%. Moreover, it turns out that flotation costs rise the larger the free float of the company is and the larger the share of stocks offered within a firm commitment cash offering is. As far as the economies of scale view is concerned, we do not find clear evidence in favour of decreasing marginal flotation costs. Moreover, fixed costs seem not to be very high in that they account on average for not more than 14-24% of total flotation costs or total underwriting fees, respectively.

Abstract:
Recent research indicates that the majority of listed firms in Germany (and also in many other countries around the world) have a dominant owner rather than being widely-held. Hence, owner-dominated firms comprise an important subset of listed companies. This article introduces the concept of an ownership-based style index of listed firms in Germany, the German Entrepreneurial Index (GEX®). Introduced in 2005, the GEX® represents recently listed, ownerdominated firms in the German Prime Standard. We review the theoretical foundation and the index construction of the GEX®. In addition, we provide an overview of its development and performance between index inception and end of 2008 and relate this to properties of the German financial market. Finally, we conclude with a critical outlook for the index future against the background of recent developments.

insider ownership, style index, ownership structure, corporate governance

Abstract:
In this paper we introduce a framework to analyze the key drivers of value creation of private equity in financial institutions and the bank holding sub-segment. We estimate the influence of market-timing, take specifications of this highly regulated industry into account, and approximate the influence of leverage and operational improvement. We prove that market-timing has a positive but limited impact on value creation in financial institution and bank holding buyouts, and we find evidence that the value creation in the capital intense and highly regulated bank holding sub-segment is not diluted by financial leverage and depends to 87% on operational improvement. Moreover, we investigate the absolute and relative performance of these transactions and draw cross industry comparisons based on a unique data set of 3,296 completed buyout transactions. We show that leveraged buyouts of financial institutions generate a median gross IRR of 29% and a median PME of 1.9 compared to a public financial services benchmark index. The more capital intense bank holding sub-segment shows a median gross IRR of 23% and also outperforms the public benchmark with a median PME of 1.5. Results are controlled by DPI and Excess IRR figures, and are tested for significance. Both categories of companies are almost consistently in the upper half of our cross industry benchmarking with partially significant higher return figures than traditional buyout industries.

Private equity, leveraged buyout, value creation, performance, financial institutions

Abstract:
This paper analyzes the determinants of returns generated by mature European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. Given this presumption, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry that yield the putative 'money chasing deals' phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of the variation in private equity funds' returns. This is especially true for venture funds, as they are affected more by illiquidity and segmentation than buy-out funds. In the context of a WLS-regression approach the paper reports a highly significant impact of total fund inflows on fund returns. It can also be shown that private equity funds' returns are driven by GP's skills as well as stand-alone investment risk. In a bootstrapping context we can show that most of these results are quite stable.

Abstract:
Several studies document that investors systematically overreact to accrual-based accounting information. We address the question to what extent this accrual anomaly is related to different accounting standards. We provide empirical evidence that the accrual anomaly is also present in Germany. However, this anomaly seems mainly to be driven by firms presenting their financial statements under IFRS or US-GAAP, while the anomaly is unlikely to exist for those firms complying with German GAAP. It is argued that introducing true and fair view accounting, like IFRS, that relies on difficult-to-verify information, may not be suitable to improve accounting information quality in the context of a weak corporate governance system.

Abstract:
This paper analyzes the determinants of returns generated by mature European private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. Given this presumption, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund in ows into the industry that yield the putative 'money chasing deals' phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of the variation in private equity funds' returns. This is especially true for venture funds, as they are affected more by illiquidity and segmentation than buy-out funds. In the context of a WLS-regression approach the paper reports a highly significant impact of total fund inflows on fund returns. It can also be shown that private equity funds' returns are driven by GP's skills as well as stand-alone investment risk. In a bootstrapping context we can show that most of these results are quite stable.

Private equity funds, performance, venture capital, buyout

Abstract:
Several studies document that investors systematically overreact to accrual-based accounting information. We address the question to what extent this accrual anomaly is related to different accounting standards. We provide empirical evidence that the accrual anomaly is also present in Germany. However, this anomaly seems mainly to be driven by firms presenting their financial statements under IFRS or US-GAAP, while the anomaly is unlikely to exist for those firms complying with German GAAP. It is argued that introducing true and fair view accounting, like IFRS, that relies on difficult-to-verify information, may not be suitable to improve accounting information quality in the context of a weak corporate governance system.

accrual anomaly, earnings persistency, conservative accounting, true and fair view accounting, accounting standards, accounting regulation, empirical accounting research, German GAAP, IFRS/IAS, US-GAAP, corporate governance

Abstract:
This paper is focused on the cost of raising capital in Germany. A cross-sectional analysis of flotation cost data for 117 IPOs over the years 1993-1998 is presented. We find average flotation costs to be 7.77 percent of gross proceeds, while underwriting fees average 5.01 percent. Our results extend the literature in two important directions. First, contrary to the conventional economies of scale view we find marginal spreads to be rather constant in gross proceeds and to be higher for more risky and more complex offerings. Fixed costs amount to 5 to 9 percent of underwriting fees. Second, by applying a principal component analysis we find issue size, an issuer risk factor, and an offering method complexity factor to have an economically meaningful impact on underwriting fees.

flotation costs, raising capital, initial public offerings, underwriting fees, economies of scale

Abstract:
The paper examines the validity of several hypothesis concerning the underpricing of initial public offerings. This hypothesis are tested on a data sample containing all IPO's on the German capital market during the period 1983- 1992. Three of our findings seem to be of special interest. First, there is significant evidence for the hypothesis that the initial return is correlated negatively with competition among underwriters. Considering that in the German official stock market only registered banks are allowed to underwrite IPO's, this could be an explanation why the mean initial return of 14% is so high relative to other countries. Second, according to the findings of other authors there are also for the German IPO's clear indications of aftermarket underwriter support. However it is unlikely, that the underpricing is only a consequence of this support, even in the long run. Third, as signaling theory suggest there is a clear positive correlation between the fraction retained by the issuer and the initial return.

Abstract:
It is the aim of this paper to take issue with the wide-spread belief that blockholdings - mainly by banks - in large German companies are suited to mitigate the free-rider problem of corporate control. This fundamental misunderstanding, especially popular among Anglo-American academic circles, is the result of the erroneous belief that German banks are located at the top of a hierarchically structured network of shareholdings and are acting in the interest of their own private shareholders. In reality, large German banks are sheltered from outside pressures by a dense network of cross-holdings, proxy votes and underdeveloped disclosure obligations. Therefore, bank managers are not forced to pursue a value maximizing investment and monitoring policy. Furthermore, one would expect that such a tight network of capital and personal relationships enhances collusion among management of all involved companies.In the first part of the paper it is shown that the German system of mutual shareholdings is dense and far-reaching. In the second part of the paper, we analyze newly introduced stock option programs. The findings suggest that there is indeed a great danger of collusion among managers tied together by a system of cross-holdings. Stock options are especially prone to collusive agreements because of the lack of relevant disclosure obligations and the almost complete absence of any understanding of these instruments. As we find out in our case-oriented analysis, stock option programs are more likely to be used as an instrument to exploit shareholders, if the company is bank-dominated or sheltered from capital market pressures through other arrangements. In companies with influential private shareholders, executive compensation by means of stock options was found to be incentive compatible.In order to support our view, in the final part of the paper the impact of bank control on the economic performance of industrial companies is analyzed from an empirical perspective. By measuring bank control in terms of long-run equity holdings of the financial sector we found out that there is a significant difference between bank-dominated companies and a control group in terms of total shareholder returns.