Academic journal article Journal of International Business Research

Speculative Returns in the Neuer Market

Academic journal article Journal of International Business Research

Speculative Returns in the Neuer Market

Article excerpt

ABSTRACT

This paper examines the speculator's return on equities listed in the German Neuer Market during the twenty-month window surrounding the initiation of the euro currency. Empirical evidence indicates that the general performance of the market, timing of the initial public offering in relation to the initiation of the euro currency, percentage of the stock that is free floating, and industry classification influence speculative returns. A Kruskal-Wallis test is employed to compare the price appreciation of initial public offerings in ten different industries. The industry with the largest one-day return is financial services, while the medical technology industry is found to be the worst performer.

INTRODUCTION

Young firms need capital to fund their expansions and growth. Investors recognize the potential of new, young firms for quick stock price appreciation. The German Stock Market established the Neuer Market in 1997 for the purpose of matching young firms with investors seeking price growth appreciation and willing to assume the risk associated with small-capitalization stocks. The Neuer Market is modeled as a German equivalent of the NASDAQ in the United States. Since its inception, the Neuer Market has grown to over 300 firms and represents the majority of the turnover of all the German stock exchanges.

The purpose of this study is to examine the determinants of speculative returns in the Neuer Market. Specific areas of interest include the impact of market conditions, liquidity and industry classifications on speculative returns. This paper is organized as follows. First, background information on the Neuer Market including admission criteria is provided. The next section offers a brief discussion of the characteristics of initial public offerings within the Neuer Market. The third section presents an empirical evaluation of the determinants of speculative returns. This is followed by a comparative industry analysis. The final section offers conclusions and suggestions for future research.

BACKGROUND

Three segments compose the German Stock Market. Official trading is the home of established, large-capitalization stocks, much like the New York Stock Exchange. The approval criteria and continuing obligations of firms listed for official trading is the most stringent of the three segments. A step below the Official Market is the Regulated Market. The volume issued and percent floated requirements are lower for firms in this market. The third segment, the Unofficial Regulated Market, is the largest market with few approval prerequisites and no continuing obligations. Warrants and foreign shares dominate it. Recognizing a need to promote growth stocks, the Frankfurt Stock Exchange established the Neuer Market within the Unofficial Regulated Market. The Neuer Market fulfills a hole in German capital markets. Young companies need capital to grow. The traditional bank loan is not befitting innovative firms starved for cash. The small firms are not established enough to receive lower interest rates and the liquidity demand of interest payments is draining on the firms and not guaranteed to the banks. The Neuer Market allows these growth-oriented firms to solicit funds from investors looking for potentially high returns and willing to undertake the corresponding risk. In addition, the venture capital that helped initiate the firms can be recaptured at the initial public offering. By offering a potentially high return exit strategy to venture capital, the Neuer Market encourages further venture capital investment.

While officially in the Unofficial Regulated Market, Neuer Market firms follow more stringent criteria for listing. The additional requirements provide greater transparency and liquidity to investors. Firms listed on the Neuer Market must publish reports quarterly and annually. In contrast, firms listed on the Official Market are only required to publish a report every six months. …

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