Europe’s New Stock Markets

Abstract

The creation of Europe’s ‘new’ stock markets represents a major experiment in market design with important implications for the ability to support innovative, fast-growing companies. We evaluate the success of these markets based on a large number of measures of firm performance and strategy, which extend to several pre- and post-listing years. Our hand-collected database is obtained from the listing prospectuses and annual reports of 538 companies which listed on the Neuer Markt, Nouveau Marche, and Nuovo Mercato from 1996 through 2001. Three findings stand out. First, these companies experience a dramatic change after the Initial Public Offering (IPO), re-balancing their capital structure, increasing their debt and investment, accelerating growth, and becoming less profitable. These changes are consistent with the existence of credit constraints, and are greater than for companies listing on the ‘main’ markets. Second, we document a considerable variation in post-IPO growth rates and corporate strategy, across both companies and markets. This variation is largely due to the ability to raise equity capital at IPO. Third, the adoption of US GAAP accounting standards substantially increases firms’ ability to raise capital. While Europe’s ‘new’ markets have provided high-growth companies with an unprecedented opportunity to finance their growth, the adoption (and enforcement) of tighter standards of disclosure is then crucial for their success.