Tilburg University
The Rise and Fall of the European New Markets
Goergen, M.; Khurshed, A.; McCahery, J.A.; Renneboog, L.D.R.
Publication date:
2002
Link to publication in Tilburg University Research Portal
Citation for published version (APA):
Goergen, M., Khurshed, A., McCahery, J. A., & Renneboog, L. D. R. (2002).
The Rise and Fall of the European
New Markets: On the Short and Long-Run Performance of High-Tech Initial Public Offerings
. (CentER
Discussion Paper; Vol. 2002-101). Finance.
General rights
Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners
and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.
• Users may download and print one copy of any publication from the public portal for the purpose of private study or research.
• You may not further distribute the material or use it for any profit-making activity or commercial gain
• You may freely distribute the URL identifying the publication in the public portal
Take down policy
If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately
and investigate your claim.
Download date: 09. aug.. 2022
No. 2002-101
THE RISE AND FALL OF THE EUROPEAN NEW
MARKETS: On the short and long-run performance of
high-tech initial public offerings
By Marc Goergen, Arif Khurshed, Joseph A. McCahery, Luc
Renneboog
October 2002
ISSN 0924-7815
The rise and fall of the European New Markets:
On the short and long-run performance of high-tech initial public offerings
Forthcoming in ‘Venture Capital Contracting and the Valuation of High Technology Firms’,
J. McCahery and L. Renneboog (eds.), Oxford University Press 2003
Marc Goergen,
Manchester School of Management,
University of Manchester Institute of Science and Technology
Arif Khurshed,
Manchester School of Accounting & Finance,
University of Manchester
Joseph A. McCahery,
Law School and Tilburg Law and Economics Center
Tilburg University
Luc Renneboog
Department of Finance, CentER for Economic Research, Tilburg Law and Economics Center
Tilburg University
JEL codes: G15, G18, G32.
Keywords: initial public offerings, underpricing, long-run underperformance, stock exchange
regulation, listing rules
Acknowledgements: The authors wish to thank the Euro.NMs for providing information and in some cases data
for this study. We would especially like to thank Massimo Grosso from Nuovo Mercato for his kind help. We
are also grateful to Marie Thérèse Camilleri Gilson for research assistance. Part of this research was funded by a
Social Science Small Grant (SGS/00624/G) from the Nuffield Foundation and by the Netherlands Organization
for Scientific Research. All remaining errors are those of Arif Khurshed.
The rise and fall of the European New Markets
1
1. Introduction
As recently as a decade ago, primary equity markets in continental Europe provided investors
with low levels of transparency and corporate governance standards (La Porta et al. 1997).
This contrasts sharply with common law jurisdictions, where investors have long enjoyed
significantly higher levels of investor protection. Certainly, continental European countries
have law regimes that differ from Anglo American jurisdictions, particularly in terms of
disclosure. New comparative research on securities markets has shown that some legal
systems give investors more protection against fraud and expropriation than others and has
suggested that the control of information asymmetry is an essential precondition for the
establishment of a strong capital market. As a minimum, increasing the level and scope of
disclosure is likely to be significant. Higher quality disclosure, which gives the investors a
higher level of protection, increases the accuracy of asset pricing, which is likely to have an
impact on investor confidence (Fox 2000).
The corporate governance regimes of most continental European countries place emphasis on
rules and regulations protecting stakeholders, such as creditors and employees, in sharp
contrast with the common law countries’ reliance on judicially-enforced legal rules to protect
investors. At a first glance, the weakness of the rules protecting minority investors from
asymmetric information and opportunism makes it harder for capital markets in continental
Europe to raise the external funds to support a higher rate of initial public offerings (IPOs) for
high-growth, start-up businesses. Given the limits on the ability of firms to raise funds,
reform-minded policymakers possess a number of alternatives that can generate rapid changes
tailored to meet the regulatory needs of issuers and investors.
Previous research has shown that one way to increase investor protection in continental
Europe would be for individual country regulators to generate a range of investor protections
within the context of a mandatory disclosure regime and supply a more effective set of
enforcement mechanisms (Bratton and McCahery 2001). Even though it would be important
to improve the disclosure requirements in company law and provide more effective
enforcement mechanisms to protect investors and creditors at the national level, it is quite
obvious that such a distinctive shift in the legal system is a lengthy process. Despite the
efficiency benefits that greater investor protection would bring to equity markets, regulators
will not, because they lack sufficient incentives, commit themselves to revise regulations that
could lead to a distinctive shift in the legal system (Coffee 2001). Further, even if EU
The rise and fall of the European New Markets
2
regulators have the incentives and resources to devise harmonized legal protections that
benefit investors, the revisions will not necessarily make expropriation more difficult
(Bebchuk and Roe 1999; Hopt 2002).
Harmonization of corporate law in the EU, of course, is not the only way that investor
protection can be improved. Given the practical difficulties of enhancing transparency and
disclosure practices, corporate governance deficiencies may be addressed alternatively by
establishing ex ante stock markets that guarantee better levels of shareholder protection and
high levels of disclosure (Pagano 1998). Indeed, this is precisely the route taken by Europe’s
‘new stock markets’, i.e. the Nieuwe Markt in Amsterdam, Euro.NM Brussels, the Neuer
Markt in Frankfurt, the Nuovo Mercato in Milan, and the Nouveau Marché in Paris, the latter
being the first of the European New Markets (Euro.NMs). Although this is not a solution for
the official markets, which are obliged to comply with the mandatory terms of the EU issuer
disclosure regime (Moloney 2002), the Euro.NMs alliance imposed additional restrictive
disclosure measures on new issuers in order to promote investor protection and investor
confidence.
Triggered to a large extent by the impressive emergence of high-tech businesses in the US,
the Euro.NMs sought to emulate the Nasdaq, a highly liquid exchange that has high disclosure
and transparency standards (Röell 1998). Thus, as with the Nasdaq, the combination of
stricter disclosure rules and less stringent entry requirements (regarding age, size, and
minimum profitability requirements) than companies face on first-tier markets led to the
development of a very active initial public offering market in Europe. In Germany, for
example, the Neuer Markt, which created the most stringent disclosure regime, accounted for
the largest share of capital raised in IPOs compared to Europe’s other new markets (Bottazzi
and Da Rin 2002). It is noteworthy, however, that not all new market segments have pursued
a high disclosure listings strategy (Jenkinson and Ljungqvist 2001). An alternative, embraced
by the United Kingdom, is to eliminate exchange-based listings rules and transfer authority to
the stock exchange regulator, which establishes the minimum rules governing admissions
(Macey and O’Hara 2002). For example, this regulatory arrangement gives the London Stock
Exchange some discretion over which applicants, subject to their satisfying the minimum
requirements, are admitted to trade on the Alternative Investment Market (AIM). As can be
seen in table 2, the AIM imposes less stringent disclosure requirements on the issuer.
