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Keywords:

  • stock exchanges;
  • second markets;
  • financial regulation;
  • IPOs;
  • AIM;
  • London Stock Exchange;
  • Neuer Markt
  • G15;
  • G30

Abstract 

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

European stock exchanges have repeatedly opened second markets to list small companies. We explain the motivation for the creation of these second markets, and the reasons why many of them have failed. We find that the average long-run performance of initial public offerings (IPOs) on second markets is dramatically worse than for main market IPOs. However, the second markets have provided firms with the opportunity to raise funds at the IPO and in follow-on offerings. The relative success of London's AIM, which is an exchange-regulated market with minimal regulations, has led other European stock exchanges to establish similar non-EU regulated second markets. Most of the IPOs on these exchange-regulated markets are offered exclusively to institutional investors, and are equivalent to private placements. These IPOs, which frequently raise only a few million euros, rarely develop liquid trading.


1. Introduction

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

Most of the stock exchanges in Europe are organised in segments, with a main market and one or more second-tier markets dedicated to particular classes of firms. Historically, second markets in Europe have been successful in hot periods and have collapsed in cold periods. The stock exchanges of the four largest European economies (Germany, France, Italy, and the UK) have launched eleven second-tier markets dedicated to particular categories of firms since 1995. Of these, only five still exist. In addition, Nasdaq set up a European market in the late 1990s, but failed to attract many listings.1

This segmentation is puzzling from the perspective of the stock exchanges. In many cases, the revenues from listing fees and trading commissions on small firms listed on second-tier markets are lower than the cost of employees involved in their management, according to interviews with heads of the primary markets of European stock exchanges. The early listing of these stocks could be viewed as a positive net present value strategy, however, if (1) enough of the stocks grow and generate large transaction fee revenues in the future, and (2) some of these successful companies would not have subsequently listed on the same country's stock exchange without this early opportunity to do so. Listing small firms might also benefit the stock exchanges in terms of providing opportunities for portfolio diversification to their investors. The second-tier markets are typically designed to meet the needs of small and young companies that would not be eligible to list on the main markets.

With their less stringent listing requirements, second markets have succeeded in attracting new listings for the stock exchanges. During the period 1995–2009, only 845 out of 3,755 IPOs on the four stock exchanges in Europe that we focus on took place on main markets. Second-tier markets account for the remaining 2,910 IPOs. It is therefore of interest to study the motives inducing a firm to go public on a second-tier market, or to delist from a main market in order to transfer to a second market.

In this paper, we document empirical patterns in delisting rates and other measures of success and failure for companies listed on main markets vs second markets. We find that the long-run performance of second market IPOs has been very poor. Over our sample period, the average 3-year buy-and-hold abnormal return (BHAR) for main market IPOs has been +12.3%, whereas the average 3-year BHAR for second market IPOs has been −19.0%. In London, the difference in 3-year BHARs has been even larger: +25.3% for Official List IPOs, and −27.5% for Alternative Investment Market (AIM) IPOs. However, the second markets have been successful in providing firms with the opportunity to raise funds at the IPO and in follow-on offerings. Surprisingly, very few second market IPOs have graduated to a main market. On the London Stock Exchange (LSE), the AIM has attracted 282 firms from the Official List, while only 90 companies left the AIM for the main market. Therefore, the net flow of companies switching markets has leaned heavily towards the AIM.

All of the second markets existing in 2011 that we focus on are organised as exchange-regulated markets, which in practice means that there are minimal regulatory requirements for the firms listed on these markets provided that they have never conducted a public offer that individual investors were eligible to purchase. Many of the IPOs on second markets are thus small offerings that are equivalent to a private placement, with a limited liquid market developing.

In this paper, we (1) document the listing choices of 3,755 European IPOs during 1995–2009, (2) describe the rise and fall of numerous second markets, (3) document the long-run abnormal returns and delisting rates for main and second market IPOs, (4) analyse the choices of firms to switch between the Official List and the AIM of the LSE, and (5) provide some thoughts on the success and failure of second markets.

2. The Evolution of Models of Market Segmentation

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

Historically, main board listing requirements have emphasised accounting thresholds such as minimum asset size or years of profitability. In the past twenty years, the listing standards for second-tier markets have instead focused on disclosure and corporate governance requirements. While the London Stock Exchange has remained committed to a two-tier structure based on certain minimum standards, the stock exchanges in Continental Europe have developed different segmentation models. We identify three models for second markets: Sequential, Sectorial, and Demand-side segmentation. The models are illustrated and defined in Table 1.

Table 1.  Evolution of the structure of European stock markets and models of segmentation
  1. a

    This table presents the evolution of models of market segmentation of the stock exchanges of the four largest European economies (Germany, France, Italy, and the UK).

  2. b

    Paris Bourse/Euronext: We use the French Paris Bourse until the creation of Euronext with the merger of the four stock exchanges of Belgium, France, the Netherlands, and Portugal, where the first listing took place on January 27, 2005. Afterwards, we consider Euronext in its entirety. The French Premier Marché, the Second Marché, the Nouveau Marché (where the first listing took place on March 20, 1996) merged into the newly created Eurolist on February 18, 2005. In parallel, Euronext launched an Exchange-regulated market, named Alternext (first listing May 17, 2005). This market coexists with the precedent Marché Libre, which replaced Marché Hors-cote in September 25, 1996.

  3. c

    Deutsche Börse: Traditionally, there have been two markets in Germany: the main (Amtlicher Markt) and the second market (Geregelter Markt), though the difference between the two was less marked than in other European stock exchanges. On November 1, 2007, Geregelter Markt was absorbed by Amtlicher Markt to create a single German EU-regulated market. The Freiverkehr Markt was launched as an Exchange-regulated market, with the first listing on June 21, 2005. Previously, the new market dedicated to high-tech companies, the Neuer Markt (first listing on March 10, 1997; closed and switched to Geregelter Markt on June 5, 2003), established a record for the average annual number of IPOs for Continental Europe (304 IPOs during the 6.5 years of its existence).

  4. d

    Borsa Italiana: The main market in Italy is the Mercato Telematico Azionario (MTA). The second market dedicated to small-and-medium-sized enterprises (SMEs) was the Mercato Ristretto until it was replaced by the Expandi market on December 1, 2003. The market dedicated to high-tech companies was launched on June 17, 1999 as Nuovo Mercato, and then labelled MTax in September 19, 2005. Both of these markets were recently closed, with the listed companies switching to the main market MTA (MTax on March 3, 2008; Expandi on June 22, 2009). The Exchange-regulated market Mercato Alternativo dei Capitali (MAC) was launched with the first listing on July 18, 2007. Following the merger with the London Stock Exchange, the AIM Italia was also launched, with the first listing on May 8, 2009.

  5. e

    London Stock Exchange: The London Stock Exchange is historically made of two markets: a main (Official List) and a second market. The Unlisted Securities Market (USM) operated until December 1, 1996. Companies listed on the USM were then forced to join the newly created Alternative Investment Market (AIM), whose first IPO took place on June 19, 1995. There has been no ‘new market’ in London, where the market segment techMark dedicated to high-tech companies listed on both the Official List and the AIM has been active since 1999.

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In the sequential segmentation model, small companies are expected to go public on a second-tier ‘seasoning’ market and, if the company is successful, move to the main market. The regulatory regime of a market in this category is meant to provide small and medium-sized enterprises with the means to finance growth, and allow them to experience life as a public company without the full discipline of the main market. This type of second-tier market, sometimes explicitly intended by the managing stock exchange as a ‘feeder’ to the main market, was common in the 1980s and 1990s. Examples include the Second Marché of Paris Bourse, the Geregelter Markt of Deutsche Börse, and the Mercato Ristretto of Borsa Italiana.

The second model of segmentation is a sectorial one and was successful in taking high-tech companies public during the so-called internet bubble (1998–2000). This model applies to the ‘New Markets’ created in 1996–1999, with admission allowed only to companies in high-tech sectors. At the end of the 1990s, the New Markets formed a pan-European network named Euro.NM, with a Markets Harmonization Agreement that established similar regulations. The members of Euro.NM were the French Nouveau Marché, the German Neuer Markt, the Dutch Nieuwe Markt NMAX, EuroNM Belgium, and the Italian Nuovo Mercato (later renamed MTax). In the UK, no independent new market was launched, but a new market segment (techMark) was created that grouped together the companies listed on the LSE operating in high-tech industries. Following the collapse of the internet bubble, the New Markets were disbanded.

The third and most successful model is a ‘demand-side’ segmentation. This model is typically associated with London's popular Alternative Investment Market (AIM). Markets in this category are not officially regulated, as defined by the European Financial Services Directive. In particular, the main effect of categorising a market as ‘Exchange-regulated’ (i.e., unregulated) is that the national listing authorities (equivalent to the US Securities and Exchange Commission) are not required to approve a firm's prospectus when its listing does not involve a public offer.2 Since inclusion in one of these markets does not constitute listing on an official market, the principal regulatory requirements for organised markets do not apply and no prospectus is required if it is a ‘non-public’ offering intended for qualified institutional buyers, in which case a shorter admission document is substituted. These qualified institutional buyers, however, may resell the IPO shares to any investor in the aftermarket.

This model of market organisation, initiated with the AIM in 1995, served as a model to be emulated by the other stock markets in Continental Europe when trying to (re)launch second-tier markets such as the Alternext by Euronext, the Freiverkehr in Germany, and the MAC in Italy. The exchange-regulated segmentation model has now been adopted for the second markets of all of the stock exchanges in Europe that we study here.

3. The IPO Market in Europe

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

In this paper, we analyse the population of all 3,755 IPOs that took place on the stock markets of the four largest European economies in the period 1995–2009. For France we use the Paris Bourse until 2004 and Euronext afterwards (the latter includes Belgian, Dutch, and Portuguese IPOs). For Germany we use the Deutsche Börse, for Italy we use the Borsa Italiana, and for the UK we use the London Stock Exchange. Our sources of data are described in the Data Appendix.

Table 2 categorises the population of IPOs by stock exchange and market type. There is no strong competition for listings between the stock exchanges of the four major economies in Europe. Or, at least, the home bias prevails over the possible benefits of listing abroad. No market other than the AIM has a significant number of IPOs by foreign companies.3 Also, the exceptional nature of the AIM does not imply any special attractiveness at the expense of the other ‘mature’ stock markets of Continental Europe.4 It is therefore not the case that a second market in one country is perceived as a close substitute for another in a different country. We deduce that the IPO market in Europe is a series of domestic markets.5

Table 2.  The population of European IPOs over the last 15 years
  1995–19971998–20002001–20032004–20062007–2009Total 1995–2009Foreign companiesNo. IPOs from Other Countries of the sampleNo. Placings
No.%No.%No.%
  1. a

    This table reports the number of Initial Public Offerings (IPOs) by stock exchange and by subperiod. Markets are classified according to the models summarised in Table 1. The number of IPOs includes only those of operating companies. As for Initial, we refer only to companies that had never been publicly listed before, on whatever stock exchange. As for Public, we do not require that public trading develops. As for Offerings, we refer only to new listings raising money, regardless of whether primary or secondary shares are being issued/sold. We therefore exclude introductions (admissions with no initial offer, common on the AIM and on all the other second markets), re-admissions, and market transfers, as well as listings of companies already listed on other stock markets. IPOs of investment entities (such as investment trusts) are also excluded. Placings, however, are included, although with this procedure shares are not offered to the public at large, but are offered solely to qualified investors. The number of placings is reported in the last column. The number of IPOs from countries of the sample is the number of companies from other countries of the sample (i.e. for London, the companies from Belgium, Italy, France, Germany, the Netherlands, and Portugal) that did not go public in their home market.

Paris B./ Euronextmain  2  7 7 663111313.5 8 7.1
 seasoning 6910111  5 018622.2 3 1.61
 new 31116 7  0 015418.4 3 1.91
 Exch–reg 2110769 979138545.915 3.91 7 1.8
 Total1233319416812283822.3293.5370.8
Deutsche Börsemain 17 55 6 461814223.511 7.73
 seasoning 11 46 9  5 8 7913.1 810.12
 new 1128211  0 030450.43611.88
 Exch–reg  0 0 0 4434 7812.91012.811316.7
 Total3938326956060316.16510.814132.2
Borsa Italianamain 33 48 22 27 1714764.2 1 0.7
 seasoning  1  1  1 14 15 3214.0 0 0.0928.1
 new  0 36 4  1  0 4117.9 0 0.0
 Exch–reg  0  0 0  0 9  9 3.9 111.19100
 Total3485274241229 6.120.9187.9
London S.E.main16514735 68 2844321.2 38 8.6 331771.6
 Exch–reg.1752742187861891,64278.832519.8161,57295.7
 Total3404212538542172,08555.536317.4191,88990.6
Total 4 Exchangesmain217257 70207 9484522.5 58 6.9 631737.5
 seasoning 81148 21 24 23297 7.9 11 3.7 39 3.0
 new 42434 22  1  049913.3 39 7.8 9
 Exch–reg1963812879273232,11456.335116.6181,60175.7
 second3199633309523462,91077.540113.8301,61042.9
 Total5361,2204001,1594403,755 45912.2361,92751.3
 %14.332.510.730.911.7  12.2    

IPOs tend to cluster in time and industry. Hot market periods with many new issues are followed by cold markets with lower issuing activity.6 Cycles in IPO activity are particularly evident in second markets. Many different types of second markets have been launched and closed after a few years. As a whole, they have attracted new companies in hot periods but not in cold ones,7 as shown in Figure 1.

image

Figure 1. Number of European IPOs by year and by market type

This figure reports the number of European IPOs by year and by market type. IPOs from the UK, Germany, France, and Italy are included for all years. After Euronext was created on January 27, 2005 with the merger of the Belgian, French, Dutch, and Portuguese exchanges, all Euronext IPOs are included.

Download figure to PowerPoint

There have been two ‘hot’ periods for IPOs during our 15-year sample period, each accounting for almost one third of our population of IPOs. The first period (1998–2000) saw the success of the ‘new’ markets in Continental Europe. The iconic market was the German Neuer Markt. Most of the firms going public in Germany over the last fifteen years chose this market (304 out of 603 IPOs over the period 1995–2009), even though it was dedicated to tech stocks and existed for less than seven years. In the year of its launch (1997), 11 of the 16 companies that listed on the Neuer Markt declared that the good image of the market was their main motive for choosing the market (Theissen, 1998). The Neuer Markt became very prestigious, and it attracted 282 companies during 1998–2000 (Table 2). Such numbers remain unmatched in the history of IPO markets in continental Europe. With the collapse of the internet bubble, the value of the brand ‘Neuer Markt’ quickly became so negative that in 2002 only one company applied for a listing on the Neuer Markt. That was the last IPO for the market, which closed in 2003.

The second hot period (2004–2006), coincided with the emergence of exchange-regulated markets, thanks to the success of the AIM. In practice, the IPOs on this type of market are often ‘non-public’ offerings distributed solely to qualified institutional buyers, and are equivalent to private placements. Out of a total of 1,642 IPOs on the AIM, 1,572 are placings, with no shares offered to the public at large.8 During 2005–2009, 38 placings have been used by companies going public on the exchange-regulated markets in continental Europe.9

4. The Choice to Go Public on Second Markets

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

4.1 Do firms going public on main vs second markets have different characteristics at the IPO?

In Table 3, we document that the characteristics of the firms going public on main markets are different from those of companies going public on second markets. First, companies on the main markets are larger and older, as expected. However, the observed differences vary according to the model of the second-tier market. Companies going public on seasoning markets are almost as old as companies listing on the main markets. Among the second markets, companies listing on the New Markets raised more capital at their IPOs. Despite the limited size of these companies (a median pre-issue assets of 11.5m €), Panel A of Table 3 reports that the IPO proceeds were substantial (a median of 28.6m €). As reported in Panel B of Table 3, the New Markets were also associated with a high level of underpricing (a median of 11.1%) and of valuations (a median Tobin's Q of 3.32).10 Panel B also reports that the public float is slightly higher on the main markets (a median of 31.9%) and the second markets (a median of 26.3%), where we define public float as the ratio of the number of shares offered at the IPO (including primary and secondary shares) over the number of shares outstanding after the IPO (i.e., pre-issue shares + primary shares).

Table 3.  European firms at IPO, by listing market
Panel A: Firm characteristics and offer proceeds
Stock ExchangeMarket modelVC-backed %Age (years)Sales (m€)Assets (m€)Proceeds (m€)
meanmedianmeanmedianmeanmedianmeanmedian
Paris B. / Euronextmain36.018.3 91,590.9166.14,021.5   220.9 630.7 166.5 
 seasoning36.817.112  80.6 35.463.826.813.2 7.2
 new38.7 7.8 6  16.0 10.415.1 8.518.811.1
 Exch-reg23.513.0 8 176.6  7.3219.8  5.531.1 1.5
 Total31.013.49316.513.7660.211.2105.76.3
Deutsche Börsemain39.734.3131,052.7124.82,087.1   78.0281.2 85.3
 seasoning29.217.1 9  31.5 15.024.917.538.021.2
 new48.711.0 8  61.2 14.550.712.564.337.6
 Exch-reg31.515.8 7  21.9  7.817.4 8.614.810.0
 Total42.617.29285.718.5522.616.3105.537.2
Borsa Italianamain22.144.431 704.3147.61,185.7   162.5 307.5 80.4
 seasoning22.722.416  56.8 33.096.835.629.018.0
 new35.9 9.8 8  62.0 22.539.722.4109.7 43.2
 Exch-reg25.010.312  21.3 16.738.528.9 8.8 8.5
 Total24.937.624472.088.0783.393.5221.452.2
London S.E.main65.7 8.8 4 509.5 41.1451.6 30.1193.1 64.8
 Exch-reg.61.9 6.6 2  26.9  5.324.5 5.414.6 6.9
 Total62.96.92129.4  8.2115.37.652.58.5
Total 4 Exchangesmain49.028.613 779.3 80.61,331.5   68.1286.3 76.5
 seasoning33.817.712  65.0 31.157.025.721.5 9.4
 new44.6 9.9 8  47.3 12.638.811.554.028.6
 Exch-reg51.5 8.2 4  53.2  6.559.0 5.717.4 5.5
 second48.5 9.5 6  53.4  9.955.3 8.524.1 9.8
 Total48.213.66217.216.5343.014.283.214.6
Main vs second Test difference   0.464   16.20***   14.52***13.74***10.26***   15.56***   12.73***   11.78***   19.17***
Panel B: Offer characteristics
Stock ExchangeMarket modelPrimary shares (%)Public float (%)Underpricing (%)Tobin's QIndustry Q
meanmedianmeanmedianmeanmedianmeanmedianmeanmedian
  1. a

    This table presents the descriptive statistics of the sample of 3,755 European IPOs during 1995–2009. Age is measured as years since incorporation to IPO. Annual Sales and Assets are the last data published in the offering prospectus. Monetary figures are in 2009 millions of Euros, using Purchasing Power Parities (EU27 = 1) by Eurostat. All financial data before 1999 were converted into Euros. The exchange rate used for companies based in non-euro countries is the average of the year of the IPO for accounting figures, while the exchange rate at the day of the IPO is used for the Proceeds of London IPOs (source: Datastream). Proceeds do not include money from the exercise of overallotment options, as this information is not available for all IPOs. Primary shares (%) is the average ratio of the number of newly issued shares over the number of pre-IPO shares, while public float is the ratio of the number of shares offered at the IPO (including primary and secondary shares) over the number of shares outstanding after the IPO (i.e. pre-issue shares + primary shares). Tobin's Q is calculated as the ratio of the market value of assets to the book value of assets, where the market value is calculated as the sum of the book value of assets and the market value of common stock less the book value of common stock. Industry Q is the average Tobin's Q of the industry to which a firm belongs and is calculated annually for each 1-digit ICB industry (Industry Classification Benchmark). The tests compare firms going public on main vs. second markets (second markets include seasoning, new and exchange-regulated markets). The significance levels are based on t-statistics (mean), the Mann-Whitney U-test (rank), or a Z-test of equal proportions as required. Statistical significance levels are at 1% (***), 5% (**), or 10% (*).

Paris B. / Euronextmain23.016.529.225.0 5.33.41.841.542.792.59
 seasoning 8.9 0.019.718.0 2.91.12.041.712.481.70
 new29.926.827.226.655.02.34.113.243.833.48
 Exch-reg 7.6 0.014.110.0 7.33.93.292.133.002.50
 Total14.06.319.818.215.92.52.962.043.002.35
Deutsche Börsemain32.429.427.028.3 9.62.52.562.032.732.32
 seasoning31.531.016.416.729.15.13.602.023.122.31
 new31.429.926.726.648.121.1 5.973.414.254.14
 Exch-reg34.631.523.423.1 3.01.43.722.272.902.50
 Total32.030.025.026.032.76.74.612.843.572.84
Borsa Italianamain23.322.131.231.9 9.73.11.771.522.281.70
 seasoning32.331.026.331.3 9.55.71.811.472.772.48
 new32.728.127.224.121.94.15.073.354.024.60
 Exch-reg35.417.125.016.720.810.0 1.901.912.352.41
 Total26.726.029.630.012.24.12.381.682.672.26
London S.E.main39.132.739.534.713.78.43.582.182.732.35
 Exch-reg.50.537.538.830.818.910.2 3.862.162.842.57
 Total48.136.339.031.417.810.03.802.162.822.54
Total 4 Exchangesmain32.927.634.531.911.35.42.831.912.662.31
 seasoning15.111.319.518.810.21.22.401.722.671.99
 new31.028.526.926.447.911.1 5.323.324.104.04
 Exch-reg42.232.933.728.416.48.83.742.162.872.54
 second37.829.231.126.321.98.33.902.343.062.59
 Total36.728.931.823.819.57.53.642.222.972.54
Main vs second Test difference   −3.87***   −2.58***    3.85***    6.93***   −5.03***  −5.90*** −4.29*** −8.52*** −6.67*** −7.27***

Finally, we investigate the role of venture capital in taking the companies public. The main result is that, at a single country level, despite their higher concentration in technology sectors, companies going public on second markets are as often venture-backed as companies on the main markets. Exchange-regulated markets seem to be perceived as a valid alternative to venture funding, allowing firms to forego mezzanine financing before listing. Some young firms may view the second market as a sort of ‘public venture market’ to finance their growth projects.11

4.2 Would firms going public on second-tier markets otherwise have remained private?

We wonder whether companies choose to go public on a second market, or rather are obliged to because they do not fulfill the listing criteria of main markets. In other words, is going public on a second market a choice or an obligation?

Panel A of Table 4 shows that the leading European stock exchanges have very similar listing criteria, as do most major stock exchanges around the world. There are basically three ‘measurable’ requirements: (1) a record of audited financial statements (3 years in all four countries studied), (2) a minimum market capitalisation (ranging from 700,000 £ on the Official List in London to 50m € on the Eurolist) and (3) free float rules (25%).12 For these requirements, free float is defined in terms of ownership control rather than in terms of liquidity.

Table 4.  Going public on the second markets: measurable listing requirements
Main vs exchange-regulated marketCountry
France Eurolist vs AlternextGermany Amtlicher vs FreiverkeherItaly MTA vs AIM Italia /MACUK Official List vs AIM4 exchanges Main vs secondEuro.NM New marketsUS
NYSENasdaq
Panel A: Listing requirements
1) Free float (Minimum percentage of shares in public hands)25% vs None25% vs None25% vs None25% vs None 20%1,100,000 shares500,000 shares
(2) Size (minimum market capitalisation)50 vs 2.5 m€1.25 m€ vs None40 m€ vs None700,000 £ vs None 5 m€60 $ m public float1 $m
3) Age (years of prior financial statements required)3 vs 23 vs 13 vs 13 vs None 3a3a3a
  1. a

    This table reports the ‘measurable’ listing requirements for the main market and the exchange-regulated market of each exchange as of early 2011. The requirements for listing on the main markets typically refer to (1) minimum free float at the IPO (although we are using the public float definition to compute the percentages; the free float and public float percentages are typically the same immediately after the IPO), (2) minimum market capitalisation at offer prices; and (3) minimum years of financial statements prior to the IPO. We applied these requirements to the companies that went public on the second exchange-regulated markets and calculated the number of companies that did not respect them (i.e. the number of companies that listed on an exchange-regulated market that could not go public on the respective main market).

  2. aWaivable by the admission committee.

Panel B: Number of IPOs on the Exchange-regulated markets, 1995–2009
No. of IPOs on the Exchange regulated markets, 1995–20093857891,642 2,114  
Failing to meet main market listing requirements due to:
 (1) Free float (% of the total)283 (73.5%)22 (28.2%)7 (77.8%)  489 (29.8%)  801 (37.9%)   
 (2) Size (% of the total)345 (89.6%)2 (2.6%)5 (55.6%)   14 (0.9%)  366 (17.3%)   
 (3) Age (% of the total) 40 (10.3%)13 (16.7%)1 (11.1%)  876 (53.3%)  930 (44.0%)   
Not meeting listing requirements for at least one reason365 (94.8%)34 (43.6%)9 (100%)1,103 (67.2%)1,511 (71.5%)   

The ‘exchange-regulated’ markets, according to EU directives, are autonomous from national listing authorities except in the case of IPOs involving a public offer. It is therefore possible to create and list a new company on these markets within a few weeks. There are no rules regarding the minimum number of shareholders.

Do companies going public on the exchange-regulated markets meet the listing requirements of the respective main markets? In Panel B of Table 4, we estimate the number of companies that could not meet the requirements. Out of the 2,114 IPOs held on exchange-regulated markets in the period 1995–2009, only 603 IPOs on exchange-regulated markets fully satisfied the stricter listing criteria. We find that 1,511 companies (71.5% of the total) could not go public on the respective main market. Furthermore, 95% of the IPOs in France that traded on the Marché Hors-cote, Marché Libre, and Alternext, and 100% of the IPOs in Italy that traded on the MAC and AIM Italia, did not fulfill the requirements of the main markets. The market capitalisation and free float requirements are especially difficult to meet. Two-thirds of the companies that went public on the AIM in London were not eligible for listing on the main market, mainly due to age constraints.13 In contrast, only 44% of the German IPOs that selected the exchange-regulated Freiverkehr Markt would not have been able to list on the main market.

4.3 Do firms going public on main vs second markets perform differently in the aftermarket?

We investigate the performance of companies after their IPOs with reference to (1) stock price performance, (2) liquidity, (3) survival profile, and (4) M&A deals and corporate control.

(1) Long-run stock price performance. 

Stock price performance is measured in terms of 3-year and 5-year Buy-and-Hold Returns (BHRs) and Buy-and-Hold Abnormal Returns (BHARs). These are calculated for stock i for horizon T as follows:

  • image

Ri,t is the return on stock i at time t, T is the time period for which the BHR is to be determined, and RM,t is the raw return of the FTSE Euromid index, excluding dividends.14 The BHARs are biased upwards by approximately 3%, since the benchmark return on the FTSE Euromid index return does not include dividends, whereas the returns on IPOs do.

Using the same benchmark index for all the IPOs means that we are comparing asset classes with different levels of risk. As a consequence, less risky companies, such as those going public on the main markets, should show a better performance if the realised market risk premium is negative, and worse performance if the realised market risk premium is positive. In Table 5, we report that on average, main market IPOs perform better than the benchmark, whereas the New Markets’ companies underperform. The 580 main market IPOs from 1995 to 2006 have an average 3-year buy-and-hold abnormal return of 12.3%, whereas the 1,725 second market IPOs have an average BHAR of −19.0%. The difference in riskiness is unlikely to account for this large difference of 31.3% in average BHARs. Giudici and Roosenboom (2004) confirm the negative performance of IPOs on the New Markets.

Table 5.  Mean stock market performance and liquidity measures for European firms after the IPO, by listing market
  Performance 3-yearPerformance 5-yearLiquidity measures (%)DelistingsReasons (%)Market transfer from (No.)
No.BHRBHARNo.BHRBHARBid-AskTurn-overNo.%Volun-taryImposedM&AUnknown
  1. a

    This table describes the performance of European IPOs. Buy-and-Hold Abnormal Returns (BHARs) are calculated for stock i in time period T as follows:

    • image
    • image

    Ri,t is the return on stock i at time t, T is the time period for which the buy-and-hold return (BHR) is calculated, N is the number of stocks in a portfolio, and Rm,t is the raw return of the FTSE Euromid index, excluding dividends. Post-IPO returns are measured over a period of 36 and 60 “months”, defined as intervals of 21 trading days. The first 21 trading days after the IPO are excluded, as underwriter banks are sometimes stabilising prices during this period. Hence, the time period is actually from 22 days to 36 or 60 months after the IPO, so at most 35 or 59 months of returns are used. Min(T, delist) is the earlier of the last month of trading or the end of the three-year of five-year window.Market transfers are not considered as delistings here (e.g. if an IPO lists on a second market and then transfers to a main market after 1.6 years, the 3-year buy-and-hold return on this stock is computed over 3 years). Average BHRs and BHARs are reported. The difference from zero of 3- and 5-year BHARs is tested based on the Lyon et al. (1999) test that controls for skewness in the distribution of abnormal returns and corrects for new listing and rebalancing biases. A further adjustment (Jegadeesh and Karceski (2009)) is performed to correct for heteroskedasticity, serial correlation, and weights that differ across observations. Heteroskedasticity arises because the number of sample firms in each month varies, while serial correlation is caused by contemporaneous returns. Liquidity is measured as bid-ask spreads and turnover relative to the first year of trading after the IPO (average values). Bid-Ask Spread (%) is calculated as the average ratio of the Bid-Ask spread divided by the midpoint of the bid and ask prices using the closing bid and ask prices from Datastream during months 2–13 after the IPO.Turnover is calculated as the average ratio of shares traded per month divided by the number of shares outstanding (%). A delisting is classified as ‘‘voluntary’’ if a firm is in compliance with an exchange's listing standards and voluntarily takes steps to delist its shares, and as “imposed” when it is required by the Stock Exchanges in cases in which firms fail to meet their listing requirements, when firms are bankrupt, in financial distress, or are undergoing some kind of restructuring or liquidation. Firms are also delisted when they are acquired, and these cases are classified as a ‘‘M&A’’. Percentage of delistings are relative to the number of IPOs, while percentage of delisting reasons are relative to the number of delistings. Finally, a company may decide to delist and transfer to another market (market transfers are not considered in delisting statistics). There were 78 transfers from second markets to main markets and 37 vice versa (36 from LSE Official List to the AIM, and one from Italy’ main market to the new market Nuovo Mercato). 3-year BHARs are calculated for IPOs from 1995 to 2006, while 5-year BHARs are calculated for IPOs from 1995 to 2004. Liquidity measures are for IPOs from 1995 to 2008. Statistics on delistings include all of the sample of 3,755 IPOs and refer to delistings taking place up to December 2010. Market transfers are not considered as delistings, but are reported separately in the last column (for Germany, the transfers when the Neuer Markt was disbanded are not included as transfers). Tests in the last row compare firms going public on main vs second markets (second markets include seasoning, new and exchange-regulated markets). The significance levels are based on t-statistics (mean), the Mann-Whitney U-test (rank), or a Z-test of equal proportions as required. Statistical significance levels are at 1% (***), 5% (**), or 10% (*).

Paris B. / Euronextmain3146.625.41537.9−9.31.14.5      
 seasoning16956.734.3***16433.215.63.111.18545.70.03.51.295.3
 new135−5.3−11.6135−33.3−58.8***2.712.47045.50.05.70.094.31
 Exch-reg204−8.5−25.2***169−4.4−46.7***12.63.512432.23.219.40.876.63
 Total53915.90.24831.627.7***7.17.129835.61.310.41.087.24
Deutsche Börsemain74−17.6−30.1***67−6.5−29.6**2.12.63222.50.00.00.0100.0
 seasoning57−66.9−69.7***55−69.2−90.73.510.02329.10.04.30.095.71
 new285−18.7−11.1284−72.2−91.92.715.09731.910.33.10.086.62
 Exch-reg1−37.2−28.32.83.400.0
 Total41725.222.540661.081.42.710.515225.26.62.60.090.83
Borsa Italianamain16131.43.815053.610.50.96.04832.716.712.545.82.11
 seasoning436.7−13.73−3.8−50.31.84.839.40.00.00.0100.0
 new35−71.7−50.135−70.2−91.90.731.31126.827.39.145.518.2
 Exch-reg2.00.500.0
 Total20016.15.9*18829.59.61.09.66227.111.49.856.122.81
London S.E.main31448.525.3**27739.312.93.09.723753.510.56.347.735.436
 Exch-reg.8353.9−27.5***4660.5−45.7***9.04.184851.621.519.630.428.571
 Total1,14913.313.1**74315.023.9*7.75.31,08552.019.116.734.230.0107
Total 4 Exchangesmain58035.212.3*50937.45.92.27.033639.89.16.544.839.537
 seasoning23025.67.72227.4−11.63.110.311137.40.03.60.995.51
 new455−18.8−14.2454−60.5−82.02.515.517835.77.34.52.885.43
 Exch-reg1,0401.4−27.0***635−0.8−46.0***9.53.997246.019.119.526.634.774
 second1,7250.719.01,31120.152.6***7.66.51,26143.315.816.021.047.278
 Total2,3058.311.21,8204.036.36.36.91,59742.514.213.826.745.4115
Main vs. second  2.69***2.45*** 5.65 ***5.62***−15.28***1.86** 0.420     
 test difference                

Table 5 also reports the long-run returns on IPOs in specific markets. Of note is the poor performance of AIM IPOs relative to Official List IPOs on the London Stock Exchange. Official List IPOs have an average 3-year BHAR of 25.3%, whereas AIM IPOs have an average 3-year BHAR of −27.5%. Gerakos et al. (2011) report similar numbers for long-run returns in London, and also report similar liquidity differences.

(2) Liquidity difference. 

If one of the benefits of listing is to provide liquidity to shares, then more liquid markets are more attractive to firms. We compare the liquidity of the companies going public on the main and second markets. We adopt two measures of liquidity. Bid-Ask Spread is the ask minus bid divided by the midpoint of the bid and ask prices, expressed as a percentage. Turnover is calculated as the average ratio of shares traded per month divided by the number of shares outstanding, also expressed as a percentage. In Table 5 we report the equally weighted means of these ratios in the 12 months beginning one month after the IPO. We expect larger spreads and lower turnovers for IPOs on the second markets, which are less liquid than the main markets. Table 5 shows that IPO companies on the main markets do indeed have lower spreads, an average of 2.2% compared to 7.6% for companies going public on second markets.15 The different types of second markets, however, have different liquidity measures. In particular, the New Markets are characterised by heavy trading volumes. High-tech companies generated such intense interest during the internet bubble that these second markets actually show the highest turnover, an average of 15.5% per month. The exchange-regulated markets represent the other extreme, where very high bid-ask spreads and low turnovers testify that liquidity is a problem for most of the listed companies.

(3) Delisting rates.

Second markets were once considered ‘seasoning’ markets, allowing businesses to experience life as a public company without the full discipline of the main markets. To some extent, this was the ‘curse’ of second-tier markets, whose successful companies were meant to list on the main market eventually, whereas unsuccessful companies were expected to delist. In practice, however, we find that delistings have not been significantly more common on second markets than on main markets. Even more interestingly, market transfers have been very uncommon, with the exception of switching to and from London's AIM. The probability of delisting varies more across countries than across the type of market, as shown in Table 5. Most of the companies that went public in London over the last fifteen years have now gone private for either good or bad reasons (52.0%). The probability of delisting is lower on the other exchanges, particularly in Germany (25.2%) and Italy (27.1%).

Figure 2 graphs the Kaplan-Meier estimator of the survival profile of IPOs, by listing market. The lowest probability to survive is found for companies going public in London and on an exchange-regulated market, whereas seasoning and new markets provide more stable listings. However, this pattern is partly due to the absence of seasoning markets and New Markets in the UK, where delistings are most common. The 60-month delisting rates are approximately 42% for exchange-regulated markets, and 20–28% for other markets. Espenlaub et al. (2012) report similar survival rates for companies going public on the exchange-regulated AIM. In the next subsection, a Cox regression model is used to compare the survival profiles of main and second market IPOs, controlling for country effects.16

image

Figure 2. Survival profile of European IPOs

This figure presents the survival curves for IPOs by type of listing market and by listing stock exchange. Market transfers are not considered as delistings.

Download figure to PowerPoint

The interpretation of these results involves several factors. First, a higher survival profile of IPOs in continental Europe than in London may be related to the nature of the companies that went public (continental European companies are bigger and older at the IPO, as shown in Table 3). More importantly, the difference in the rate of delisting must also consider regulatory differences. Delisting is more difficult and ‘costly’ in continental Europe, where delistings compulsorily involve a tender offer.17

(4) M&A deals and the market for corporate control. 

The probability that a firm will transfer control or delist depends on the type of market. IPOs can be part of a larger process of transferring control, for example when owner-managers of private firms use the IPO as part of a divestiture strategy (Brennan and Franks, 1997; Zingales, 1995). That is, in order to identify potential acquirers and to increase a firm's visibility, the shareholders of a private firm could use a sequential divestiture through an IPO and later transactions rather than an outright sale. This divesture strategy could be of particular interest for taking companies public on the second markets, where the listing fees are lower.

Finally, a company may decide to delist and transfer to another market within the same stock exchange.18 In contrast to London, market transfers are very uncommon in continental Europe, as shown in the last column of Table 5. In our sample, only 8 out of 1,670 companies chose to switch markets by March 2010 in France, Germany and Italy. Of prime importance for our research, there has also been a significant flow of companies switching between the markets on the London Stock Exchange. 282 companies left the LSE Official List to transfer to the AIM from June 1995 to March 2010, of which 36 went public in 1995 or later. During the same period, 90 firms switched from the AIM to the Official List, of which 71 were IPOs. Of the latter, 8 IPO companies that transferred to the Official List later came back to the AIM. This bi-directional flow between the two markets points to complementarities in their appeal. Section 5 of this paper is dedicated to the specific issue of transferring between main and second markets.

In Table 5, we report simple sorts. In Table 6 we now investigate whether being listed on a main or a second market affects the risk of (1) being delisted, (2) being targeted in M&A deals, and (3) transferring control. We define the last scenario as occurring when the equity sold to acquirers in M&A deals reaches 50% of shares outstanding.19 To this end, we implement Cox proportional hazard models where the dependent variable is the probability of ‘failure’ per unit time (month), conditional on failure not having occurred yet. The marginal effect of an independent variable is measured by the hazard ratio. A positive coefficient implies a hazard ratio of greater than one, suggesting that an increase of the covariate increases the ‘failure’ rate. In our model, the independent variables include dummies for the market type (a main market dummy) in the specifications in columns 1, 3 and 5, and dummies for the specific stock exchange (whether main or second market) in specifications 2, 4, and 6. The regressions control for a number of firm characteristics: size (log of net sales in the year prior to the IPO, adjusted for inflation), age (log of one plus the firm's age at the IPO), leverage (debt over assets), profitability, Tobin's Q, and VC-backing. Finally, we introduce dummies for the industry and year.

Table 6.  Cox proportional hazard regression on the probability to delist, be targeted in M&A deals, or transfer control
Model aDelistingsTargeted in M&AsTransfer control
  1. a

    This table reports the results of the regressions that investigate whether being listed on a main vs second market affect the probability of (1) being delisted, (2) being targeted in an M&A deal, whether successful and unsuccessful, and (3) transferring control. To this end, we implement Cox proportional hazard models where the dependent variable is the probability of ‘failure’ per unit time (month), conditional on failure not having occurred yet. We restrict the sample to firms that actually have a listing choice between the main and second market. Hence, we consider the 603 companies that went public on exchange-regulated markets but could choose the main markets and, for companies listed on the main markets, we assume that big companies would not consider second markets as a listing option. We put a maximum limit on the market capitalisation at the IPO of 200 m € (adjusted for inflation); 512 companies have a smaller market cap. The restricted sample is therefore composed of 1,115 companies going public in 1995–2009, with seasoned equity offerings (SEOs) and acquisitions attempts by the firm measured through March 2010, and with delistings measured until December 2010. The control transfer is assumed to take place when the equity sold to acquirers in M&A deals reaches 50 percent of shares outstanding. In specifications 1, 3, and 5, the Main market dummy takes on a value of 1 if the IPO lists on a main market, and is 0 otherwise. In specifications 2, 4, and 6, the exchange dummies equal 1 if the IPO takes place on either the main or second market of the respective exchange, and is 0 otherwise. Inflation-adjusted sales, leverage (%), and profitability (ROI%) are relative to the last data published in the offering prospectus; Tobin's Q is measured at the IPO, using the offer price and the post-issue book value of assets. Statistical significance levels are at *** (1%); ** (5%); or * (10%).

  2. az-Test for significance of the independent variables, based on robust standard errors.

  3. bWald χ2-Test for significance of the regression.

Main market dummy   −0.94*** −0.89**−0.68*
Paris B. / Euronext 0.03−0.14   −0.21 
Deutsche Börse 0.23 0.59* 0.22
London S.E.   0.85*** 0.76*  0.48*
Control variables      
 Ln Sales−0.34−0.46*−0.19 −0.29* −0.11 −0.26*
 Ln (1 + Age) 0.12 0.110.150.02 0.20  0.20
 Leverage 0.45  0.45*0.21 0.24*0.08 0.11
 Profitability−0.25−0.39 −0.43*−0.42* −0.35* −0.38*
 Tobin's Q−0.12−0.56  −0.54**−0.82**−0.22 −0.48*
 VC-backed−0.24−0.46  0.14*0.13 0.12* 0.11
 Industry dummiesYesYesYesYesYesYes
 Year dummiesYesYesYesYesYesYes
Log Pseudo Likelihood b−876***−836***−1,457***−1,342***−879***−892***
Firms involved in delistings or M&A deals 39.9%445 firms54.3%605 firms28.5%318 firms

We restrict this analysis to firms that actually have a choice between listing on the main or second markets. There are 603 companies that went public on exchange-regulated markets but could have chosen the main markets, as identified in Table 4. As for companies that listed on main markets, we assume that those above a certain size would not consider second markets. We choose a limit on the market capitalisation at the IPO of 200m €, adjusted for inflation. Among the 845 main market IPOs, 512 companies have a smaller market cap. The restricted sample is therefore composed of 1,115 companies for which the choice of market was not pre-ordained.20 As shown in the bottom row of Table 6, 39.9% of these firms delisted before December 2010, and 54.3% were targeted in an M&A attempt.

Table 6 reports the results of the Cox proportional hazard regressions. We find that going public on a main market reduces the probability of being delisted, being targeted by M&A deals, and transferring control (though the statistical significance is limited in the last case). The negative coefficient on profitability in the M&A and control transfer regressions may be interpreted as evidence in support of the matching theory of ownership change: less efficient firms are more often targeted by other companies (Lichtenberg and Siegel, 1990). The negative coefficients on Tobin's Q in the M&A regressions may indicate that firms with higher valuations are less appealing targets. Finally, we find weak evidence of a positive correlation between VC-backing and the probability of being acquired. The presence of venture capital may be perceived as a mark of quality (certification) by a potential acquirer, increasing its appeal as a target.

4.4 Do firms going public on main vs second markets have different financing and investing strategies?

A relevant aspect of the decision to go public is the ability to raise capital, first at the IPO and later through Seasoned Equity Offerings (SEOs), also known as follow-on offerings. At the IPO, a primary offering of newly issued shares increases the number of shares outstanding and raises capital for the firm. However, as discussed in Section 4.3, an IPO may also be a divestment strategy. As a preliminary investigation, we hypothesise that IPOs with a high fraction of primary shares tend to be used to satisfy the need to raise capital for investment purposes, while the need to provide an exit for existing shareholders is more in line with offers of secondary shares. Firms that are relatively new and growing fast are likely to have a great demand for external capital. Consistent with this logic, in Table 3 we show that companies going public on the second markets typically offer a larger IPO, in that the ratio of new shares to existing shares is higher. This pattern may indicate that the perceived role of the stock market is coherent with the nature of the listing firms; i.e., they appeal to young and small firms that need external funds to finance their investments. Also, to the degree that investors want companies to have a minimum market value of the public float, a small company will need to sell a larger fraction of its stock to cross this threshold. Furthermore, since there are fixed costs to going public, a small company that wants to sell a small number of shares will not find it optimal to go public (see, e.g., Chemmanur and Fulghieri, 1999).

We test whether this propensity for second markets’ companies to raise fresh funds at the IPO is continued in the aftermarket.21 We also examine the related question of whether companies listed on main and second markets have different propensities to invest externally (i.e., to make acquisitions). We can test whether the funds raised at the IPO and during the post-IPO period through secondary offers are used to pursue growth through acquisitions. As shown in the bottom row of Table 7, 52.6% of the 1,115 issuers conducted at least one SEO, and 58.5% made at least one acquisition attempt.

Table 7.  Poisson regressions on the financing and investment behavior of European IPOs
ModelNumber of SEOsNumber of acquisitions
Coeff.valuesCoeff.valuesCoeff.valuesCoeff.values
  1. a

    This table reports the results of the regressions that investigate whether being listed on a main vs second market affects the propensity to raise funds or to acquire. The dependent variables are (1) the number of equity deals after the IPO and (2) the number of acquisitions pursued, with seasoned equity offerings (SEOs) and acquisition attempts by the firm measured through March 2010. We restrict the sample to firms that actually have a listing choice between the main and second market. Hence, we consider the 603 companies that went public on exchange-regulated markets but could choose the main markets. As for companies listed on the main markets, we assume that big companies would not consider second markets as a listing option. We put a maximum limit on the market capitalisation at the IPO of 200 m€; 512 companies have a smaller market cap. The restricted sample is therefore composed of 1,115 companies going public in 1995–2009. Sales, leverage, and profitability are relative to the last data published in the offering prospectus; Tobin's Q is measured at the IPO, using the offer price and post-issue shares outstanding, and the post-issue book value of assets. In the columns labelled “values”, coefficients of the regressions are multiplied by the mean of the dependent variable. These values measure the effect on the dependent variable of a one-unit change in the explanatory variable. Statistical significance levels are at 1% (***), 5% (**), or 10% (*), calculated using z-tests based on robust standard errors. The statistical significance of the pseudo R2 is based on a Wald χ2/test.

Main market dummy0.340.720.65**2.25
Paris B. / Euronext−0.18  −0.380.150.52
Deutsche Börse−0.08  −0.170.19*0.40
London S.E.  0.56** 1.19− 0.11−0.23
Control variables        
 Ln Sales0.220.47 0.35* 0.740.12*0.420.18**0.62
 Ln (1 + Age)0.180.380.17 0.36−0.19−0.66 −0.15*−0.52
 Leverage0.190.400.23 0.49− 0.06−0.21−0.07−0.24
 Profitability−0.31* −0.66  −0.32* −0.68− 0.16−0.55−0.36**−1.25
 Tobin's Q−0.21* −0.45  −0.23* −0.49− 0.92***−3.18− 0.87**−3.01
 VC-backed 0.41*0.870.31 0.66−0.29**−1.00−0.31**−1.07
 Industry dummiesYes Yes Yes Yes 
 Year dummiesYes Yes Yes Yes 
Pseudo R2%  9.44***    9.86*** 11.64*** 12.15*** 
Mean values of dependent variable2.12   3.46   
Firms involved in SEO or M&A deals52.6%586 firms  58.5%663 firms  

In Table 7, we use two Poisson regression models. First, to investigate the propensity of firms to raise fresh capital after the IPO, the dependent variable is the number of equity issues pursued by a firm after its floatation. In the second model, the dependent variable is the number of acquisitions pursued by a firm after its floatation. We use Poisson regressions because the dependent variables are small counts with a minimum of zero. We use the restricted sample of 1,115 firms that had a choice between the main and second markets, and rely on the same control variables as in previous models (Section 4.3).

To give an economic interpretation to a coefficient in a Poisson regression, the coefficient is multiplied by the mean of the dependent variable. These means are reported at the bottom of Table 7 and the product of the coefficient times the mean of the dependent variable is reported in the ‘values’ column. Compared to IPOs on the second markets, we find that companies going public on the main markets have a similar frequency of follow-on equity issues but a greater propensity to pursue acquisitions. For example, there are 0.34 × 2.12 = 0.72 more SEOs for main market IPOs than for second market IPOs. UK firms are more active in the SEO market, while German firms take part more frequently in acquisitions. Firm size is positively related to the number of deals undertaken as an acquirer. Interestingly, more profitable firms are characterised by a lower frequency of raising equity after the IPO, probably because they have more internal funds available. Surprisingly, companies with higher valuations at the IPO tend to be less active in the aftermarket, with the number of acquisitions decreasing by 3 deals per unit increase in the post-IPO Tobin's Q. Venture Capital backing is negatively related to the propensity to acquire, but positively related (though the significance of this relation is low) to the number of SEOs. These patterns may be due to the types of firms that venture capitalists finance.

5. The Choice to Transfer from Main Markets to Second Markets

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

If a firm chooses to transfer its listing to another market, the transfer may be because the attributes of the listing location have changed, or because the firm itself changed. We examine the motivations for companies switching to a market with a different regulatory regime.

This analysis is related to the literature examining the costs and benefits associated with regulation. While different authors (e.g. Mahoney and Mei, 2009; Greenstone et al., 2006; Coates, 2007; and Leuz, 2007) arrive at different conclusions, in general this literature suggests that policymakers’ enthusiasm for tighter regulatory standards is not matched by unambiguous evidence that the benefits outweigh the costs. Furthermore, some authors have recently cautioned that the optimal amount of disclosure and reporting is likely to vary across firms (Bushee and Leuz, 2005; Iliev, 2010).

A number of empirical studies explore the reasons why firms switch between listing regimes and how the switch affects their valuation and the liquidity of their shares. Harris et al. (2008) study companies that were forced to delist from Nasdaq and then traded on the Pink Sheets. They find that the move cost shareholders dearly. Macey et al. (2008) analyse mandatory delistings where companies moved from the NYSE to the Pink Sheets due to breaches of listing requirements. They find that the costs of delisting are generally high, with the stock price considerably lower on the Pink Sheets than on the NYSE; bid-ask spreads and volatility also tend to increase after delisting. Leuz et al. (2008) investigate the performance of companies that voluntarily deregistered their shares in the period 1998–2004, and thus ceased to be subject to SEC reporting requirements. They find that firms that deregister tend to have weaker corporate governance and worse prospects than firms that do not.

In this section, we investigate the motivation behind the decision to delist from one market in order to transfer to another. As shown in Table 5, transfers are uncommon in continental Europe.22 We therefore investigate the transfer decision only with reference to the AIM and the official list in London. Market transfer within the LSE has been very frequent, despite the two markets sharing the same legal and trading systems.

Since its launch in June 1995, the AIM has attracted 282 firms from the Official List, while only 90 companies left the AIM for the main market, as shown in Figure 3. Therefore, perhaps surprisingly, the net flow of companies switching markets has leaned heavily towards the AIM. In particular, this trend is strongest from 2001 to 2006, when 77% of the transfers occur. The number of transfers decreases dramatically in the last three years of our sample period.23 During the AIM's six-year period of great attractiveness (2001–2006), the Official List recorded only 19 firms transferring from the AIM. In contrast, there were 18 such transfers in 2000.

image

Figure 3. Number of transfers within the markets of the London Stock Exchange, 1996–2009

This figure reports the number of transfers between LSE Official List and AIM.

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5.1 What are the motivations behind the decision to transfer to second markets?

Companies transferring between markets issue an official document which sometimes explains the motivations leading to the decision, especially when transferring to the Official List. Table 8 summarises these reasons. Firms transferring to the AIM often cite lower costs (31.7%), flexibility (20.3%), and minor regulation (16.3%).24 These reasons are all related to the more flexible environment of the AIM. Jenkinson and Ramadorai (2010) analyse the press releases of switching firms, and find that the most common reason for transferring to the AIM was ‘the burden imposed by the continuing obligations associated with the listing rules of the Official List’.25 This is an important point: besides the obvious differences in the listing requirements, there are important differences between the markets regarding a company's ongoing obligations. For instance, firms on the Official List have to comply with the stringent requirements set out in ‘Listing, Disclosure, and Transparency Rules’, whereas no such directives are given to AIM companies.

Table 8.  Motivations of transfers within the markets of the London Stock Exchange, 1996–2009
 From Official List to AIMFrom AIM to Official List
No.%No.%
  1. a

    This table lists the motivations reported by firms for transferring between the Official List and the AIM of the London Stock Exchange. This information is taken from the companies’ transfer documents, at the section entitled ‘background and reasons for transferring to AIM’ or ‘reasons for listing’. 123 out of the 282 firms transferring from the Official List to the AIM disclosed their motivations, with 202 separate motivations being listed. 61 out of the 90 firms transferring from the AIM to the Official List disclosed their motivations, with 75 separate motivations being listed.

Lower Costs3931.700.0
M&A3830.958.2
Growth3528.5914.8
Interest of shareholders3024.43963.9
More flexibility2520.300.0
Less regulation2016.300.0
Fiscal benefits1512.200.0
Visibility & growth86.52236.1
Rules Required21.600.0

Other common motivations for transferring to the AIM are the possibility to grow (6.5%) and in particular to pursue M&As (30.9%). For companies listed on the AIM, shareholder approval for a merger or acquisition is required only if the transaction is at least equal to the value of the company itself. Moreover, announcing the transaction to the market suffices for AIM companies willing to pursue related party transactions, whereas related party transactions would require shareholder approval for Official List companies.

5.2 Is the market transfer related to a change in governance of the firm?

The trading mechanisms used by AIM companies are identical to those used by companies on the Official List. However, only firms on the Official List require approval from the UK Listing Authority. They are subject to the Combined Code on Corporate Governance, which was revised in 2003 in response to the corporate scandals that induced the Sarbanes-Oxley Act in the US. This revision could be considered to be a regulatory cost-increasing change.26 In contrast, the listing requirements of the AIM are minimal. Hence, we would expect a transfer to the Official List to be related to an increase in the level of corporate governance. Vice versa, we would expect a decrease in corporate governance to be associated with transferring to the AIM, even though these firms typically state that they do not envisage alterations in their standards of governance.

To investigate the evolution in the mechanisms of corporate governance, we compare the transferring firms with a set of comparable companies that differ mainly in that they decided to stay on the same market. The matching sample is composed of companies listed on the AIM, as this is the reference market for companies desiring more flexibility. We start with the entire population of AIM firms in the period 1995–2010 that do not belong to our sample of transferring firms, as described in the Appendix. We use nearest-neighbor propensity scores based on several independent characteristics considered important to the analysis (Dehejia and Wahba, 2002). Specifically, we estimate this score using a logistic regression, where the predictive variables are firm size, age, and industry dummies. In this way, we create a matched sample of 90 listed firms that do not transfer markets, which can be compared to the sample of transferring firms.27 We refer to the sub-samples as the ‘matching sample’ and ‘transfer sample’ hereafter. We collected the annual reports of companies in the matching and transfer samples, in order to investigate four variables affecting corporate governance policies: 1) board size, 2) the number and proportion of non-executive directors, 3) whether there is a split between the figures of CEO and Chairman, and 4) whether there is a non-executive chairman.

In Table 9, we show that firms transferring from the AIM to the Official List change their corporate governance mechanisms in preparation for switching. Three years before the transfer, the transferring firms are similar to those of the matching sample. On average, they both have boards of five to six members, of which 40% are non-executives. Having separate individuals occupy the positions of chairman and CEO is common (78%), as is having a non-executive chairman (61% matching vs 52% transfer). As time passes, however, the difference between transferring and matching companies becomes more pronounced. The number of board members and the percentage of non-executives rise in firms that move to the Official List, while they remain almost stable for non-transferring companies. In particular, many companies add a director in anticipation of the transfer. As soon as they join the main market, they also raise the proportion of non-executive directors, and often the chairman becomes a non-executive. The different evolution in the split between chairman and CEO is less evident.

Table 9.  Evolution of corporate governance characteristics around market transfer on the LSE, 1995–2009
YearSampleNo. obsNo. directorsNon-executive DirectorsSplit (%)Non exe. chair (%)
MeanMedianMean (No)Mean (%)
  1. a

    This table compares the sample of firms transferring from the Alternative Investment Market (AIM) to the Official List (OL) and vice versa with a matched sample of non-transferring firms listed on the AIM. We consider four variables: (1) No. Directors is the size of the board of directors; (2) ‘Non executive directors’ refers to the number and proportion of non-executive members of the board of directors; (3) ‘Split’ is the proportion of companies that split the roles of the Chairman and the CEO; (4) ‘Non executive chairman’ is the proportion of companies that appointed a non-executive director as a chairman. The tests are for the difference between the transfer and the matching sample. Significance levels are based on t-statistics (mean), the Mann-Whitney U-test for the median (which tests whether the ranks are drawn from the same distribution, so if there is differential skewness, the ranks can be significantly different even if the medians are the same), or a Z-test of equal proportions as required. Statistical significance levels are at 1% (***), 5% (**) and 10% (*).

 AIM to OL315.776***2.4841.877.451.7
−3OL to AIM1846.12**6***2.77**45.067.444.6
 Matching235.305***2.1339.578.360.9
 AIM to OL515.986***2.7442.571.156.5*
−2OL to AIM1955.896***2.6945.364.143.9
 Matching405.685***2.6545.377.565.0
 AIM to OL556.60**7***3.1244.075.557.4
−1OL to AIM2025.646***2.6446.262.4*48.5
 Matching585.916***2.9047.777.653.4
 AIM to OL606.48**6***3.25*49.375.956.9
 0OL to AIM2145.525***2.6046.365.4*44.4
 Matching675.825***2.7546.371.150.7
 AIM to OL526.67***6***3.54***52.4*80.068.6**
 1OL to AIM1995.485***2.6347.764.8*45.5
 Matching715.736***2.6144.576.150.7
 AIM to OL386.68***6***3.45***52.0**91.973.0***
 2OL to AIM1725.315***2.5747.8*66.8*46.8
 Matching595.395***2.3241.676.357.6
 AIM to OL306.58***7***3.58***54.4***97.776.7**
 3OL to AIM1075.175***2.4446.371.046.7
 Matching265.045***2.0840.376.950.0

On the other hand, companies moving from the main market to the AIM tend to decrease their level of corporate governance. Three years before the transfer, they have larger boards than companies on the AIM. However, this difference soon disappears, and the governance mechanisms of companies joining the AIM from the main market become almost indistinguishable from those of other AIM-listed firms.28

6. Valuation and Listing Choices

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

One motivation for choosing between a main market listing and a second market listing is that there might be valuation differences if capital markets are not perfectly integrated.29 By choosing to list on a more regulated market, the company is expected to commit itself to better governance and higher disclosure. Controlling shareholders therefore trade off the cost of improved investor protection and market monitoring, which reduces their private benefits, against the better financing opportunities expected from a major market (Doidge et al., 2009). The superior regulation hypothesis predicts that firms with higher Tobin's Q are more likely to list on main markets, because firms with greater growth potential want such opportunities, and because a greater commitment to regulation results in a higher Q. As a result, we expect that firms listed on the main market are worth more.

Offsetting this tendency, companies listing on second markets can more easily schedule their IPO to take advantage of ‘windows of opportunity’. These are periods of market buoyancy during which other companies in the industry tend to be overvalued (or alternatively, have their cash flows capitalised at a higher multiple). The most obvious example is the Internet bubble, which affected the valuation of technology firms. The New Markets provided an easy path for listing firms, which often had extremely high Q ratios, partly due to their limited pre-issue book value (Table 3).

Thus, valuation differences between markets may be a causal effect of the different regulatory requirements, or may reflect the choice to go public on a market where investors are currently giving higher valuations. For instance, one of the reasons that a Chinese firm may decide to list in Shanghai rather than Hong Kong or Singapore is that investors in Shanghai are willing to pay a higher price on an imperfectly integrated market. The same logic applies to main market and second market listings. We explore whether the differences in valuation and performance between main and second markets IPOs affect the listing choices of IPOs in the following years.

Figure 4 shows the number of IPOs per year and their median Tobin's Q (Tobin's Q IPOs). This is compared to the median Tobin's Q of all listed firms for that year (Tobin's Q listed firms). The latter sample consists of all 7,067 listed firms present in Datastream for the four stock exchanges (France, Germany, Italy, and the UK).30 Inspection of Figure 4 shows a positive correlation between the level of the market (Tobin's Q) and IPO volumes, for both measures. In particular, the difference in valuations between main and second market companies is correlated with the distribution of IPOs in the following periods. The two ‘hot’ periods, with more than 200 IPOs per year on the second markets (1998–2000 and 2004–2007), are preceded by years in which the difference in median valuations between main and second market companies increases.

image

Figure 4. Number of European IPOs by year and by market type

This figure graphs the number of IPOs by year (histograms) and their median Tobin's Q at listing (solid lines), distinguishing between main and second markets. The dotted lines represent instead the median Tobin's Q ratios of listed firms (main vs second markets listed firms). The median value for each year refers only to firms that are listed at the end of the corresponding year. The sample of listed firms is made of 7,067 firms present in Datastream for the four stock exchanges (France, Germany, Italy, the UK). Both listed (Datastream: Active) and unlisted firms (Datastream: Dead series) are included in the selection criteria. Tobin's Q is measured as the ratio of market value of assets to the book value of assets, where the market value is calculated as the sum of the book value of assets and the market value of common stock less the book value of common stock (the source of data for listed firms is Datastream). For IPOs, the market value is measured at the offer price using the post-issue number of shares outstanding and the book value is the post-IPO value of assets.

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7. Conclusions

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

In countries with sophisticated financial systems there is usually more than one market for the trading of securities, and these markets are characterised by different regulatory requirements. Second markets have less stringent requirements than main markets, and the vast majority of European IPOs during 1995–2009 have listed on the former. Two second markets listed most of the firms going public in their respective countries. The majority of firms going public in Germany during this period chose the Neuer Markt, even though it was dedicated to tech stocks and only existed for seven years. Despite its minimal protection of minority shareholders, London's AIM has succeeded in attracting many listings, including both IPOs and transfers from the Official List. Most of the IPOs on this exchange-regulated market, however, are offered exclusively to institutional investors, and are equivalent to private placements.

We find that the long-run performance of second-market IPOs in Europe is poor relative to that of main market IPOs: 3-year buy-and-hold abnormal returns of −19.0% for second-market IPOs vs +12.3% for main market IPOs. This underperformance is present even when internet bubble-period IPOs are excluded from the sample. Among the different types of second markets, the long-run performance is worst on exchange-regulated markets such as the AIM. One interpretation of this differential performance is that investors are insufficiently skeptical about the returns that can be expected from firms going public on markets with lower regulatory requirements.

We also find that, after controlling for the size and age of the listing company, IPOs that list on second markets are more likely to be subsequently delisted or targeted by an acquiring firm. They are also less prone to make acquisitions than main market-listed IPOs, and rarely develop liquid trading. However, these markets have been successful in providing small firms with the opportunity to raise funds at the IPO and in follow-on offerings; more than half of their newly listed companies are able to conduct seasoned offerings later.

Generally, the expectation is that successful companies listed on a second market will eventually ‘graduate’ to the main market. This transfer has almost never happened on the stock exchanges of continental Europe. Transfer to the Official List has occurred in London, but even more small cap firms on the Official List have moved down to the AIM, particularly in the period from 2001 to 2006. In general, second markets have been attractive to companies in hot periods while rapidly collapsing in cold ones. The two ‘hot’ periods with more than 200 IPOs per year on the second markets (1998–2000 and 2004–2007) were preceded by years in which there was an increase in the ratio of median valuations between companies listed on second and main markets.

Appendix

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References

Data Appendix

A.1 The population of Initial Public Offerings

Our main source of information is the EURIPO database (http://www.euripo.eu), managed by Universoft, a spin-off of the University of Bergamo (Italy). It contains data and offering prospectuses on more than 5,000 companies that went public in Europe since 1985. Based on these data, we consider the population of all 3,755 companies that went public on the stock markets of the four largest European economies (Germany, the UK, France, and Italy) during the period 1995–2009. The sample of Initial Public Offerings includes all and only ‘real’ IPOs, i.e., those associated with operating companies. As for public, we do not require that public trading develops. As for Initial, we refer only to companies that had never been publicly listed before, on whatever stock exchange. As for Offerings, we refer only to new listings raising money, regardless of whether primary or secondary shares are being issued/sold. Our sample of IPOs therefore excludes introductions (admissions with no initial offer, common on the AIM and on all the other second markets), re-admissions, and market transfers, as well as listings of companies already listed on other stock markets. The IPOs of investment entities (such as investment trusts) are also excluded. Private placements, however, are included if they are listed on an exchange (e.g., UK placings).

A.2 The population of firms that delist and transfer to another market

Information on market transfers comes from the stock exchanges. In particular, for the sample of companies listed on the London Stock Exchange that switched from the AIM to the Official List and vice versa, we use data from the LSE directory ‘New Issue and IPO summary’, which classifies all AIM admissions and has done so from the inception of AIM. Transfers from the AIM to the Official List are traced through the AIM Factsheets, by looking at the section ‘Cancellation of admission’. AIM Factsheets have been published monthly on the LSE website since 1995. The motivations for a transfer are deduced from the official transfer documents.

A.3 Firm information

We collect our information from issuer prospectuses, transfer documents, and annual reports. Data are codified for all available years prior to the IPO (note that a prospectus contains mandatory information for at least three years before listing), as well as for all available years after the IPO (from subsequent annual reports). The prospectuses provide information such as the year and country of incorporation, the size of the offer and public float, and financial and business data. Offer data have been cross-checked with Dealogic. For companies whose fiscal years end in a month different from December, we considered their accounting data to end the following December.

For the continental European firms, since 1999 most accounting information is reported in euros. In earlier years, we use monthly average exchange rates between the ECU and national currencies to obtain a euro-equivalent. For non-euro based companies, the exchange rate used for financial statement information is the annual average. For information related to the offer (e.g. IPO proceeds), however, we use the exchange rate on the day of the IPO. Our source of data on exchange rates is Datastream.

However, apart from descriptive statistics, the financial data are only employed in panel regressions where they can be left in local currencies. The section dedicated to market transfer refers only to the London Stock Exchange. For that section, monetary figures are in pounds sterling. Inflation-adjusted measures reported in Table 3 and used for selecting the sample of Table 5 are in 2009 millions of Euros, using Purchasing Power Parities (EU27 = 1) by Eurostat. The industry classification of each firm is defined by the four stock exchanges, based on the ICB (Industry Classification Benchmark) standard.

A.4 Venture capital

In order to identify venture capital financing, we employed a broad definition. To be specific, we define venture capital firms as institutional shareholders that focus on start-up financing, including bank subsidiaries. This information comes from a detailed examination of the directors’ associations and ‘Other significant shareholders’ section of the prospectus, which are standard disclosure requirements in Europe. Such information is provided for at least three years prior to the IPO. The companies in our sample attracted venture capital from several sources, including national associations such as the European Private Equity and Venture Capital Association (EVCA), British Venture Capital Association (BVCA), Association Francaise des Investisseurs en Capital (AFIC), Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK), Associazione italiana del private equity e venture capital (AIFI), and National Venture Capital Association (NVCA). We referred to other directories in our search, including Pratt's Guide to Venture Capital Sources and the Venture Capital Resource Directory. Finally, we also included Venture Capital Trusts (VCTs) managed by established VC firms.

A.5 Share information

Offer prices are taken from either the offering prospectus, when disclosed as fixed price offers, or from the website of the stock exchange. The first-day price for calculating underpricing was provided by the stock exchanges. Stock prices, trading volumes, and bid-ask spreads are from Datastream, as is the benchmark FTSE Euromid index. Information on delistings up to December 2010 comes from the directories of the stock exchanges, cross-checked with Datastream. The motivations for delisting are deduced from official statistics provided by the stock exchanges, again measured through December 2010. A delisting is classified as ‘‘voluntary’’ if a firm is in compliance with an exchange's listing standards and voluntarily takes steps to delist its shares. A delisting is classified as ‘imposed’ when it is required by the Stock Exchanges because the firm fails to meet its requirements, goes bankrupt, is experiencing financial distress, or is undergoing restructuring or liquidation. Firms are also delisted when they are acquired, and these cases are classified as ‘‘M&A’.

A.6 M&As, SEOs and control transfer

Information on merger and acquisition (M&A) deals, seasoned equity offerings (SEOs) and other capital raisings is collected from Thomson One Banker Deals, which in turn relies on other sources such as stock exchanges, trade publications, law firms, and investment bank surveys. This database provides information on worldwide markets from publicly announced M&As involving both private and public firms. Information has been gathered for companies going public in 1995–2009, with SEOs and acquisition attempts by the firm measured through March 2010. In line with other authors (e.g. Bertrand and Zuniga, 2006), we keep both completed (78.6% of the deals of our sample firms) or pending (21.4%) restructuring deals. Thus, our sample firms could be targeted in several M&A transactions, since M&As do not refer exclusively to the combination of two companies to form a new company. The raw data were checked to eliminate double counting of transactions. Deals are identified by the cut-off ownership levels for mandatory disclosures required by national laws. In all the jurisdictions evaluated, there is a formal obligation for major shareholders to disclose their holdings in a company. The threshold triggering this obligation varies from country to country. France (Code de Commerce, article L. 233–7) and Germany (Securities Acquisition and Take-over Act, sections 21 and 22) adopt 5%, as does the US, while Italy (Law No. 58 of 1998) and the UK (Companies Act 1985 sections 198–212) require disclosure at 2% and 3%, respectively. To identify those companies whose control was transferred in M&As, we summed the number of shares transacted in M&A deals (where the firm was the target). Control is assumed to transfer when the equity sold to acquirers reaches 50 percent.

A.7 Corporate governance

Our source of information on LSE-listed companies that did not transfer (i.e., the matching sample) is the London Stock Exchange website. Data on size (net sales), age (since incorporation), and industry are from Thomson One Banker Deals and are used for the matching procedure. Data on board structure for transferring and matching firms are from their financial statements or from their IPO official documents.

We consider four variables of corporate governance: (1) ‘No. Directors’ is the size of the board of directors; (2) ‘Non executive directors’ refers to the number and proportion of non-executive members of the board of directors; (3) ‘Split’ is the proportion of companies that split the roles of the Chairman and the CEO; and (4) ‘Non executive chairman’ is the proportion of companies that appointed a non-executive director as a chairman.

Footnotes
  • 1

    In the US, Nasdaq has not followed this pattern of collapsing during cold markets, at least partly because of its lack of ties with what had once been the main market, the New York Stock Exchange (NYSE). In contrast, the American Stock Exchange (Amex), now owned by NYSE Euronext, has faded into obscurity as a venue for domestic operating companies. Many major Asian countries also have second-tier markets aimed at small companies, such as China's Shenzhen ChiNext and Hong Kong's GEM.

  • 2

    Under Part VI of the Financial Markets and Securities Act 2000, the UK Listing Authority (UKLA) has a legal obligation to oversee the listing process, and to ensure that its rules are met. This duty requires the UKLA to review and approve the prospectus or listing particulars of any security before it can be admitted to listing in the Official List. On the other hand, since the AIM is not a Recognised Investment Exchange, neither the UKLA nor the LSE are required to approve the prospectus as long as the listing does not involve a public offer. Rather, the exchange relies on the company's Nominated Advisor (NomAd) to ensure compliance. This opportunity would have vanished with the introduction of the EU Prospectus Directive in 2003, which required any issuer admitted to trading on a regulated market to produce a UKLA-approved prospectus. To preserve the different regulatory regime, the LSE changed the status of the AIM from a regulated market to an ‘exchange-regulated’ market (a multilateral trading facility) in 2004. As such, companies listing on the AIM through a placing, with no shares distributed to the public at large, state in their Admission Document: ‘The rules of AIM are less demanding than those of the Official List of the UK Listing Authority. It is emphasised that no application is being made for admission of these securities to the Official List of the UK Listing Authority. Further, the London Stock Exchange has not itself approved the contents of this document.’

  • 3

    Only 36 companies from our sample countries chose a foreign market for their IPO. These are mainly Dutch companies that listed either on the German Neuer Markt during the first ‘hot’ period of our sample, or on the AIM during the second ‘hot’ period. Similar exceptions involve Austrian and Swiss companies going public in Germany.

  • 4

    The AIM is the only European market that has attracted significant international attention. However, as Doidge et al. (2009) demonstrate, it is incorrect to interpret the success of the AIM as evidence of a decline in the attractiveness of US exchanges. The foreign companies going public through IPOs on the AIM are mainly from tax-haven British Territories such as Bermuda, British Virgin Islands, Guernsey, Isle of Man, Jersey, and the Cayman Islands, from countries with historical ties to Britain (Australia, Canada, Hong Kong, and USA), or from Israel. The number of IPOs on the AIM from countries not of these types can be counted on the fingers of two hands.

  • 5

    For this reason, throughout the paper we consider country effects but do not address the issue of international attractiveness. We restrict each firm's choice to listing among the different stock markets (i.e., second vs main market) within the same national exchange. Our aim is to identify the motives and consequences of choosing the second-tier market.

  • 6

    Several theoretical models offer explanations for this phenomenon. Most of them imply a correlation between corporate financial decisions and capital market prices. The basic idea is that financing decisions may be conditioned by the intention to capitalise on temporary mispricing. Firms would raise capital when it is convenient, generally via the issuance of overvalued securities. Whether this is corporate opportunism, compensation for risk, or simply good luck is hard to prove (Baker, 2009). However, viewed as a whole, the evidence indicates that market valuations play a nontrivial role in driving equity issues (Graham and Harvey, 2001; Baker and Wurgler, 2002). In particular, they affect the decision to go public and the timing of the offer (Ritter and Welch, 2002). Ritter (2011) considers the low volume of IPOs this past decade in many developed countries, and argues that it could be due to ‘a structural break whose fundamental cause is attributable to some of the same global and technological forces that are the underlying causes of changes in the distribution of income and wealth throughout the world.’Gao et al. (2011) identify the cause of the structural shift as a decline in the relative profitability of small stand-alone companies compared to larger organisations.

  • 7

    The average number of IPOs per year on the main markets as a group in our sample is 56, but this number varies between 3 (in 2009) and 108 (in 2000). The average number of IPOs per year on second markets also varies. New Markets have an average of 46 IPOs per year during 1996–2007, when at least one New Market was operating, with only 4 IPOs after 2001. The number of IPOs per year in seasoning markets varies from 0 to 73, whereas on exchange-regulated markets the variation is from 16 to 353.

  • 8

    The remaining 70 IPOs on the AIM are hybrid offers that required a prospectus vetted and approved by the national regulator. Until 1991, placings were allowed on the London Stock Exchange for offers raising up to £15 million, with public offers being mandatory for larger issues. Following the Initial Public Offers Review in July 1990, the LSE expanded the use of placings, and in December 1993, the threshold was raised to £25 million. From January 1995, the LSE allowed scientific research-based companies to choose freely between placings, public offers, and hybrids without regard to offer size (Amendment 4). In January 1996, the LSE abolished restrictions on retail participation for all types of issuers.

  • 9

    9 of these placing IPOs are on the Italian market Expandi, which was a EU-regulated seasoning market before it was transformed into an exchange-regulated market in December 2007.

  • 10

    Tobin's Q is measured as the ratio of the market value of assets to the book value of assets, where the market value is calculated as the sum of (1) the book value of assets and (2) the market value at the offer price of common stock minus the book value of common stock. However, the New Markets’ IPOs were restricted to a few high-tech industries with Q-values above the norm (Bonardo et al., 2011). This assertion is supported by the average ‘Industry Q’, defined for each firm as the average Tobin's Q of the industry to which the firm belongs, which is calculated annually for each 1-digit ICB industry (Industry Classification Benchmark). The IPO firms in the New Markets show higher Q-values (a mean of 5.32 in the row near the bottom of Panel B of Table 3) than their respective Industry Q-values (a mean of 4.10 in the same row) would indicate. Section 6 of this paper is dedicated to the relationship between valuation differences and the number of IPOs in the following periods, and especially to their distribution between main and second markets.

  • 11

    Of course, the strength of these patterns depends a great deal on country specificities. For instance, the proportion of VC-backed IPOs is larger on the London Stock Exchange than on any other market. To take another example, companies in Italy are typically more mature when they decide to go public.

  • 12

    There are other requirements that can be an even more important barrier to entry, but are not quantifiable. These involve levels of compliance, on-going obligations regarding disclosure, and transparency.

  • 13

    Age is measured in years since incorporation. If age is measured since the creation of the company, the measured age would be higher for some companies, as several companies incorporated only when they decided to go public.

  • 14

    Post-IPO returns are measured over periods of 36 and 60 ‘months’ defined as intervals of 21 trading days. The first 21 trading days after the IPO are excluded, as underwriters are sometimes still stabilising prices during this period. Thus, the BHR reflects the return an investor could earn, without assuming that the investor was able to receive a share allocation at the offer price. Returns include both capital gains and dividends. Min(T, delist) is the earlier of the last month of trading or the end of the three-year or five-year window. Market transfers are not considered delistings. For example, if an IPO lists on a second market and then transfers to a main market after 1.6 years, the 3-year buy-and-hold return on this stock is computed over 3 years.

  • 15

    If we calculate the turnover divided by the number of newly issued shares (instead of total shares outstanding), the average turnover of the main markets increases more than that of the second markets.

  • 16

    Tables 5 and 6 document that firms going public on a second market have a higher probability of delisting, but this correlation does not demonstrate causality. We are unable to address the endogeneity of the listing choices of the sample companies.

  • 17

    The idea is that, by imposing an offer to purchase, the minority shareholders of firms going private are protected from ‘leaving money on the table’, since they can recoup at least the residual value of the company. This continental European tender offer requirement, although it protects minority shareholders, sometimes results in companies with very few trades remaining listed for a long time.

  • 18

    In Table 5, market transfers are not considered ‘real’ delistings. They are accounted for separately in the last column.

  • 19

    As reported in the data appendix, information on delistings is deduced from official statistics provided by the stock exchanges, measured through December 2010, while information on M&A deals is collected from Thomson One Banker Deals, measured through March 2010. Deals are identified by the cut-off ownership levels for mandatory disclosures required by national laws (2 to 5%). Thus, our sample firms could be targeted in several M&A transactions, since M&As do not refer exclusively to the combination of two companies to form a new company. To identify those companies whose control was transferred in M&As, we summed the number of shares transacted in M&A deals (where the firm was the target). Control is assumed to transfer when the equity sold to acquirers reaches 50 percent. Hence, the 318 firms with control transfer are by definition part of the sample of 605 targets. As for the 445 delistings, these could be targeted in M&A deals prior to or at delisting (26.7% of delistings are through M&A, as reported in Table 5). To give an example, the Italian biotech company Novuspharma listed on the Nuovo Mercato in November 2000 and was targeted in M&As twice (including a control transfer), before being delisted on January 2004.

  • 20

    The restricted sample is composed of 539 AIM companies, 44 Freiverker companies, and 20 companies listed on Euronext's exchange-regulated markets (we do not consider other regulated second markets such as the New Markets), plus 295 IPOs on the LSE Official List, 100 on the MTA of Borsa Italiana, 65 on the main market of the Deutsche Börse, and 52 on the main markets of Euronext.

  • 21

    The IPO market and the M&A market are not as independent as often assumed. The fresh capital raised through an IPO could raise funds needed to fuel the firm's external growth. However, the IPO also facilitates stock deals, establishes a market price, and creates a pool of public shares, allowing the stock to be used as currency to buy other firms. Indeed, prospects for future deals grow as the company's value to investors becomes less uncertain, since the IPO places a value on the firm (see Brau and Fawcett, 2006; Bancel and Mittoo, 2009; Celikyurt et al., 2010; Bonardo et al., 2010; Hovakimian and Hutton, 2010; Brau et al., 2012; Hsieh et al., 2011; Meoli et al., 2012).

  • 22

    Market transfers on the three continental stock exchanges are extremely rare (less than 30 in 15 years), and market transfers from one country to another did not happen between the four stock exchanges under investigation during our sample period.

  • 23

    A possible motivation for this reduction in transfers from the Official List to the AIM after 2007 is the following: until the end of 2006, the decision to switch between the two markets could be made by management without shareholder agreement. In 2007, the rules were changed so that firms switching from the main to the second market need to obtain the approval of a majority of the shareholders before doing so.

  • 24

    A less common motivation (cited by 12.2% of our sample) is the fiscal benefits of transferring to the AIM. The UK offers several tax advantages to investments in qualifying unquoted companies, including companies traded on the AIM. Some of these advantages help individual investors (business asset taper relief and gift relief on the Capital Gains Tax, the Enterprise Investment Scheme, the inheritance tax, relief for losses, and Venture Capital Trusts VCTs) and corporate investors (Corporate Venturing Scheme). An outline of the various tax reliefs available to investors in AIM companies is reported on the website of the London Stock Exchange.

  • 25

    Leitterstorf et al. (2008) and Jenkinson and Ramadorai (2010) study the effects of LSE market transfer announcements on stock prices. Leitterstorf et al. (2008) find that firms that only announce a transfer do not experience any statistically or economically significant abnormal returns. Abnormal returns are found only for firms that announce an equity issue alongside their decision to transfer. Among such firms, those companies switching from the AIM to the Official List experience positive returns while those switching the other way experience negative returns. They find no significant liquidity effect associated with the transfers. Jenkinson and Ramadorai (2010) find that companies moving from the AIM to the Official List experience positive announcement effects, whereas companies switching the other way experience negative announcement effects. However, once these companies actually start trading on the AIM, average returns are strongly positive. In summary, firms switching to a lighter regulatory regime tend to suffer negative return and liquidity effects around the announcement and/or movement date. However, these price changes may be a signal about the prospects of the firm rather than revealing the effect of lighter disclosure regulation.

  • 26

    The Cadbury Report, published in 1992, included a ‘Code of Best Practice’. In 1998, the Hampel Report led to the publication of the Combined Code of Corporate Governance (‘Combined Code’).

  • 27

    To match treatment units with control units, we first estimate the propensity scores based on servable characteristics in year 0, the year of transfer. Second, we separate the treatment group from the rest of the population and sort the observations within each group from lowest to highest propensity score. Third, we discard any independent companies with a propensity score outside the range exhibited by transfer firms (common support criterion). Fourth, we group the remaining independent firms into ‘blocks’ with similar propensity scores and perform balancing tests for each predictive variable as well as the propensity scores. These balancing tests are based on differences in the mean t-tests of transferring and non-transferring companies within each block. Finally, we rank the firms within each block by propensity score and assign each treatment firm with its closest match from the control sample.

  • 28

    The only difference, although statistically weak (10%), is actually in favour of the matching firms. The split between chairman and CEO seems to become less frequent in companies that joined the AIM from the main market than in other AIM-listed firms.

  • 29

    Lerner (1994) hypothesises that private-market vs public-market valuation ratios vary over time, and that this ratio affects a biotech firm's decision to go public or seek additional venture capital financing. The cross-listing literature also recognises that valuation differences affect a firm's choice of whether or not to cross-list (Doidge et al., 2009). Furthermore, the style investing literature (see Barberis and Shleifer, 2003) documents that firms categorised as similar have a higher covariance once a categorisation is made.

  • 30

    We include both listed (Datastream: Active) and unlisted firms (Datastream: Dead). The average value for each year refers only to firms that are listed at the end of the corresponding year.

References

  1. Top of page
  2. Abstract 
  3. 1. Introduction
  4. 2. The Evolution of Models of Market Segmentation
  5. 3. The IPO Market in Europe
  6. 4. The Choice to Go Public on Second Markets
  7. 5. The Choice to Transfer from Main Markets to Second Markets
  8. 6. Valuation and Listing Choices
  9. 7. Conclusions
  10. Appendix
  11. References
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