Raising Capital with Initial Public Share Issues in Germany

Some underpricing of initial public offerings (IPO) is desirable due to uncertainty about the true value of untraded shares and the need to attract investors to subscribe. However, excessive underpricing is harmful to existing shareholders and discourages other issuers from selling shares. The historical record for 51 IPOs offered from 1977 to 1985 in Germany is examined to determine the accuracy with which IPO issuers in Germany set the offer price. Comparing the offer price and the market price when trading begins shows that underpricing for all 51 issues averaged 28%. A test of secondary market pricing efficiency for 36 German IPOs offered from 1983 to 1985 indicates that the initial market price gives a reasonable estimate of the true underpricing for these IPOs. The underpricing for the German IPOs compares favorably with most other markets, but results for Hong Kong indicate an even lower level of underpricing is attainable on average. If underpricing is closer to 10%, the gains in earnings per share, dividends paid, voting control retained, and market value will be significant for issuers and owners.