Benoît Leleux and Daniel Muzyka

Secondary markets in Europe have been thrown into a recession of their own
in the late 1980s and early 1990s, with a rapid decline in both the number of
new firms applying for a listing and the total amounts of financing raised.
France declined from 53 IPOs in 1987 to less than 11 in 1991. The United
Kingdom plummeted from 128 to 36 IPOs over the same period. While cycles
in the volume of new introductions have been witnessed in the past, the current
decline seems to be more than cyclical, leading some market authorities to
reconsider the very existence of their secondary markets: Britain closed its
Unlisted Securities Market to new entrants in late 1994 after having shut down
its third market in late 1990, Holland shut its second market in 1993, and other
markets, such as Germany, Spain, Italy, Denmark or Belgium have seen very
little if any activity over the last three years. ¹ Particularly affected are professional
investors such as venture capitalists, which have long relied on public equity
markets to realize a significant proportion of their investments. ² Without this
harvesting mechanism at their disposal to modulate ownership and reallocate
investments and skills, investors are now forced to reconsider the desirability
of some investments in light of the reduced exit opportunities set.

Conventional explanations for the rapid decline of the markets include over-
regulation, complex listing requirements, the absence of an equity culture in
Europe, the lack of competition among national market places (most secondary
markets are organized and run by the main exchanges), and a shortage of
growth companies. These explanations focus mainly on the supply side of the
market. But the lack of supply could be the symptom rather than the cause of
the current situation. In particular, insufficient investor interest, and the resulting
lack of demand for IPO shares, could as well explain the state of the markets.
This chapter posits that long-term underperformance of IPO shares floated in
Europe could have contributed to this lack of demand. In particular, abnormally
low returns earned on IPO shares in seasoned trades may have affected investors'
interest in new issues. The proposition is tested by analyzing the performance
of some 307 IPOs in France, the UK, Germany, the Netherlands, and Belgium.

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