ADVANCES IN FINANCIAL ECONOMICS VOLUME 10 THE RISE AND FALL OF EUROPE’S NEW STOCK MARKETS EDITED BY GIANCARLO GIUDICI Politecnico di Milano, Dipartimento di Ingegneria Gestionale, Italy PETER ROOSENBOOM Rotterdam School of Management, Erasmus University, the Netherlands 2004 Amsterdam – Boston – Heidelberg – London – New York – Oxford Paris – San Diego – San Francisco – Singapore – Sydney – Tokyo THE RISE AND FALL OF EUROPE’S NEW STOCK MARKETS ADVANCES IN FINANCIAL ECONOMICS Series Editors: Mark Hirschey, Kose John and Anil K. Makhija ELSEVIER B.V. ELSEVIER Inc. ELSEVIER Ltd ELSEVIER Ltd Sara Burgerhartstraat 25 525 B Street, Suite 1900 The Boulevard, Langford 84 Theobalds Road P.O. Box 211 San Diego Lane, Kidlington London 1000 AE Amsterdam CA 92101-4495 Oxford OX5 1GB WC1X 8RR The Netherlands USA UK UK © 2004 Elsevier Ltd. All rights reserved. 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CONTENTS LIST OF CONTRIBUTORS vii PREFACE ix VENTURE CAPITAL AND NEW STOCK MARKETS IN EUROPE Giancarlo Giudici and Peter Roosenboom 1 PRICING INITIAL PUBLIC OFFERINGS ON EUROPE’S NEW STOCK MARKETS Giancarlo Giudici and Peter Roosenboom 25 FINANCING GROWTH AND INNOVATION THROUGH NEW STOCK MARKETS: THE CASE OF EUROPEAN BIOTECHNOLOGY FIRMS Fabio Bertoni and Pier Andrea Randone 61 MANAGERIAL INCENTIVES AT THE INITIAL PUBLIC OFFERING: AN EMPIRICAL ANALYSIS OF THE ALTERNATIVE INVESTMENT MARKET Peter Roosenboom 81 THE VALUATION OF FIRMS LISTED ON THE NUOVO MERCATO: THE PEER COMPARABLES APPROACH Lucio Cassia, Stefano Paleari and Silvio Vismara 113 VALUING INTERNET STOCKS AT THE INITIAL PUBLIC OFFERING Michiel Botman, Peter Roosenboom and Tjalling van der Goot 131 v vi THE ROLE OF ACCOUNTING DATA AND WEB-TRAFFIC IN THE PRICING OF GERMAN INTERNET STOCKS Andreas Trautwein and Sven Vorstius 157 THE EXPIRATION OF MANDATORY AND VOLUNTARY IPO LOCK-UP PROVISIONS – EMPIRICAL EVIDENCE FROM GERMANY’S NEUER MARKT Eric Nowak 181 UNDERPRICING OF VENTURE-BACKED AND NON VENTURE-BACKED IPOS: GERMANY’S NEUER MARKT Stefanie A. Franzke 201 THE PERFORMANCE OF VENTURE-BACKED IPOS ON EUROPE’S NEW STOCK MARKETS: EVIDENCE FROM FRANCE, GERMANY AND THE U.K. Georg Rindermann 231 THE NEUER MARKT: AN (OVERLY) RISKY ASSET OF GERMANY’S FINANCIAL SYSTEM Hans-Peter Burghof and Adrian Hunger 295 THE LONG-TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS ON EUROPE’S NEW STOCK MARKETS Giancarlo Giudici and Peter Roosenboom 329 LIST OF CONTRIBUTORS Fabio Bertoni Politecnico di Milano, Milan, Italy Michiel Botman University of Amsterdam, Amsterdam, The Netherlands Hans-Peter Burghof University of Hohenheim, Stuttgart, Germany Lucio Cassia University of Bergamo, Dalmine, Italy Stefanie A. Franzke Center for Financial Studies and J. W. Goethe-University, Frankfurt am Main, Germany Giancarlo Giudici Politecnico di Milano, Milan, Italy Adrian Hunger University of Munich and Dresdner Bank AG, Munich, Germany Eric Nowak University of Lugano, Lugano, Switzerland Stefano Paleari University of Bergamo, Dalmine, Italy Pier Andrea Randone Politecnico di Milano, Milan, Italy Georg Rindermann Allianz Group, Munich, Germany Peter Roosenboom Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands Andreas Trautwein WHU Otto Beisheim Graduate School of Management, Vallendar, Germany Tjalling van der Goot University of Amsterdam, Amsterdam, The Netherlands Silvio Vismara University of Bergamo, Dalmine, Italy Sven Vorstius WHU Otto Beisheim Graduate School of Management, Vallendar, Germany vii PREFACE With the opening of the Nouveau March ´ e in France in 1996, followed by the Neuer Markt in Germany in 1997 and the Nuovo Mercato in Italy in 1999, the opportunities for small companies to obtain a listing on European exchanges were growing rapidly. Other European countries with new stock markets included Belgium, Denmark, Finland, Greece, Ireland, the Netherlands, Poland, Portugal, Spain, Sweden and Switzerland. These stock markets had one common aim – to attract early stage, innovative and high-growth firms that would not have been viable candidates for public equity financing on the main markets of European stock exchanges. Of these new markets, the Neuer Markt emerged as Europe’s answer to NASDAQ. However, Europe’s new markets met with only limited success. Many markets were unable to attract sufficient numbers of listings to sustain market interest, while others suffered from inadequate rules or poor liquidity. In addition, Europe’s new stock markets were hard-hit by the bursting of the Internet bubble. The market capitalisation of new markets fell to record lows in 2001 and 2002. Insider trading scandals and accounting frauds tarnished the reputation of new markets. As a result, investor confidence quickly disappeared. The most painful consequence has been the closure of EuroNM Belgium in 2001, the German Neuer Markt in 2003 and NASDAQ Europe in 2004. What went wrong? On the one hand, markets for high-growth companies were inherently volatile. The overoptimistic valuations of the Internet bubble had to be corrected. On the other hand, there were more specific reasons for the failure of Europe’s new stock markets. These lightly regulated markets were located at the juncture between private venture capital and main stock exchanges. They could be viewed as “public” venture capital that partially substituted for deficient private venture capital markets in Europe. However, stock market financing lacked the typical provisions such as active monitoring and convenants that are implemented by venture capitalists to protect their investments against information asymmetries and entrepreneurs’ opportunism. At the same time, listing requirements imposed by the new stock markets did not protect investors from scandals and frauds. On paper, the Neuer Markt had the most stringent listing requirements in Europe. Companies had to report quarterly earnings under U.S. or international accounting standards within two months of ix x PREFACE them being available and could issue only common, as opposed to preference, shares. Moreover, insiders had to agree to a six-month lock-up period following the IPO before they could sell their shares. However, the enforcement of these rules was mostly lacking. For example, insiders of some companies listed on the Neuer Markt circumvented the lock-up rules and several companies reported false annual and quarterly reports. In addition, the Neuer Markt did not have kick-out clauses comparable to NASDAQ that allowed it to strike penny stocks from listing. Although many of the Neuer Markt companies became insolvent, it was relatively difficult for these companies to be expelled from the market until October 2001. This meant that these companies continued to tarnish the reputation of the Neuer Markt. This book discusses the rise and fall of Europe’s new stock markets. The book consists of 12 chapters. We will briefly discuss each chapter in turn. Chapter 1, co-authored by Giancarlo Giudici and Peter Roosenboom, describes the development of venture capital and new stock markets in Europe. Markets for high-growth stocks offer venture capitalists a valuable exit opportunity for their investments. This allows them to re-invest their money in other start-up companies and may spur new business creation and technological innovation. They show that the private equity market in Europe today is as large as it was just before the advent of new stock markets in 1997–1999. As such, the need for stock markets that allow private equity investors to divest their equity stakes in growth companies did not disappear. In Chapter 2, Giancarlo Giudici and Peter Roosenboom examine the differences in pricing Initial Public Offerings (IPOs) on Europe’s new stock markets and on the main stock markets of European exchanges. Analyzing a large sample of 1,120 European IPOs, they find that companies that went public on new markets are significantly smaller, younger and riskier than companies that listed on the main markets. They report a 22.3 percentage point difference in the average first-day return of 578 companies that went public on new markets (34.3%) and the average first-day return of 542 companies that went public on main markets (12%). They attempt to explain this difference. Their results show that reduced incentives to control wealth losses and differences in firm and offer characteristics partially explain higher first-day returns on new markets. Their results also show that the opportunity to bundle IPO deals has been important to control underpricing costs on new stock markets. However, a large part of the difference in average first-day return cannot be explained by differences in sample characteristics. Chapter 3, written by Fabio Bertoni and Pierandrea Randone, analyses how capital is raised and employed by a sample of 28 European biotechnology companies listed on Europe’s new stock markets from 1996 to 2000. The authors analyse the financing and the investment policy of these companies, and make a [...]... delusion, to the burst of the Internet bubble and to the numerous cases of frauds and defaults, that sank the image of the growth exchange and caused its closing The closing of the Neuer Markt and the rebranding and restructuring of the entire Frankfurt stock market indicate the seriousness of the crisis of German public equity markets Chapter 12 is written by Giancarlo Giudici and Peter Roosenboom This... announced (such as the project of the iX exchange between the Frankfurt and the London stock markets, or the acquisition of the London Stock Exchange by the Stockholm Exchange) and sometimes implemented (such as the Euronext and Norex alliances) The advent of new markets around Europe from 1995 to 2000 is probably the most striking evidence that, in a favourable market momentum, stock exchanges preferred... more firms to the stock market than in the past; (ii) the growth of private equity investments, especially in technology start-ups These start-up companies went public on stock exchanges, taking advantage of the euphoria for high tech and dot.com stock; (iii) the establishment of new stock markets for growth and technology companies (the Neuer Markt in Germany, the Nouveau March´ in France, the Nuovo e... the most important new stock markets) Among these recent developments, the third represents the most intriguing one in European financial markets New stock markets played a crucial role in the rapid expansion between 1998 and 2000, as well as in the dramatic decline in 2001 and 2002, when the market capitalisation of new markets fell to record lows The most painful consequence has been the closure of. .. opportunity for their investments This allows them to re-invest their money in other start-up companies and may increase the rate of new business creation and the pace of technological innovation Stock markets can thus serve as catalysts for economic growth and the creation of jobs This chapter continues as follows Section 2 discusses the evolution of venture capital, private equity and stock exchanges... ABSTRACT In this chapter we describe the development of venture capital and new stock markets in Europe We argue that markets for high-growth stocks offer venture capitalists a valuable exit opportunity for their investments This allows them to re-invest their money in other start-up companies and may spur the rate of new business creation and technological innovation The private equity market in Europe... expelled from listing for their low level of capitalisation The scandals that lead to the collapse of the Neuer Markt are numerous Its closure in 2003 and the consequent transfer of the listed companies to the main segments of the Deutsche B¨ rse have been justified by the loss of investor o confidence 3.5 The Nuovo Mercato (Italy) The debate about the incapability of the Milan Stock Exchange to attract... Mercato coincided with the height of investors’ euphoria for Internet and high-tech stock, so that in a few months the Italian new market exceeded the capitalisation of the French counterpart, born three years before From the second half of 2000, the Nuovo Mercato suffered the world crisis of stock markets, so that only a handful of companies listed in 2001 and none in 2002 (see Fig 9) The admission requirements... experience of the largest new markets In Spain, the Nuevo Mercado was established in April 2000 The first 10 companies listed on the Nuevo Mercado transferred from the main board of the exchange, and were operating in high-tech sectors The largest company by far has been Terra Networks (now Terra-Lycos) The Spanish Nuevo Mercado is the only new market, among the others, accepting the flotation only of profitable... and Italian new markets, but the substantial failure of the objective to establish a pan-European exchange caused its abandonment, leaving full autonomy to single national new markets A further obstacle towards the integration has been the establishment of the Euronext alliance in September 2000, grouping the exchanges in Paris, Amsterdam and Brussels, and later Lisbon In the context of the restructuring . to the burst of the Internet bubble and to the numerous cases of frauds and defaults, that sank the image of the growth exchange and caused its closing. The closing of the Neuer Markt and the. for their investments. This allows them to re-invest their money in other start-up companies and may increase the rate of new business creation and the pace of technological innovation. Stock markets. announced (such as the project of the iX exchange between the Frankfurt and the London stock markets, or the acquisition of the London Stock Exchange by the Stockholm Exchange) and sometimes implemented