Market Segmentation and Ipo-Underpricing: The German Experience

Abstract

Underpricing of initial public offerings (IPOs) is a well-known phenomenon in financial capital markets worldwide. Even if several explanations and theories deal with the difference of the issue price of new shares and their first trading price in the secondary market, the underpricing-puzzle is still unsolved. Based on the implications of Rock (1986) and Beatty/Ritter (1986) this study focuses on the influence of vertical market segmentation. The analysis of 435 German IPOs from 1997-2002 shows that the empirical findings are not clear in harmony with what would be expected because IPO-underpricing is the highest in the Neuer Markt even if the Neuer Markt is the second larges market segment in Germany for IPOs and demands the highest listing requirements.

Keywords: IPO, Underpricing, Initial Public Offerings, Market Segmentation

JEL Classification: G10, G14, G18, G18, G38, K22