The Causes of Ipo-Underpricing in the German Capital Market

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