LONG-RUN PERFORMANCE OF INITIAL PUBLIC OFFERINGS IN THE GERMAN STOCK MARKET: THE FAMILY BUSINESS EXPERIENCE 1977 TO 1998

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Abstract

This paper investigates the long-run performance of initial public offerings of 174 family firms floated in Germany between 1977 and 1998. Family businesses typically come closest to the ideal of non- separation of ownership from control. The fundamental change in ownership structure induced by the flotation represents a change in the governance of the firm as for the first time dispersed outsiders buy equity capital. An examination of the stock price performance allows drawing conclusions to explain the impact of governance changes on firm value. A prediction of stock price performance spans two theories: Advantages of modern corporations where management and ownership are separated are cut short by the so-called principal-agent problem. Managers – the agents – could take actions against the interest of shareholders – the principals. Agency problems in closely-held family firms should be less predominant. On the other hand, the rent-protection theory predicts that family owners have incentives to skim private benefits at the expense of firm performance. Depending on the extent of these two effects, family-owned firms should out-, respectively underperform the market. The empirical evidence seems to support the private benefit hypothesis: 3 years after the listing the market-adjusted return was on average –25.31% compared to a broad index. The underperformance increased to –53.50% after 60 months. Even when excluding potential new economy and Neuer Markt biases, the underperformance is a statistically significant –10.50% and –50.13%, respectively.

Keywords: Ownership Structure, Family Firms, Agency Problems, Private Benefits, Long-run Performance, Buy-and-Hold Abnormal Returns

How to cite this paper: Kuklinski, J., & Schiereck, D. (2007). Long-run performance of initial public offerings in the German stock market: The family business experience 1977 to 1998. Corporate Ownership & Control, 4(4-3), 357-396. https://doi.org/10.22495/cocv4i4c3p3