Most important findings suggest that IPO’s were overpriced in the pre-mandatory period, hence it is not surprising that underpricing increased

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of French and German Firms

Master Thesis

Ninke Dijkstra – s1975013

ninkedijkstra@hotmail.com Supervisor: W. Westerman Co-assessor: M. Hernandez

University of Groningen

Faculty of Economics and Business MSc. International Financial Management

January 8, 2016

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Abstract: This study focusses on the impact of mandatory IFRS adoption on IPO underpricing of German and French listed firms. Since 2005, IFRS became mandatory for in principle all EU listed firms. Concepts of information asymmetry between a firm’s manager and its investors, and auditing and accounting enforcement are used to find how IFRS affected IPO underpricing. Furthermore, a distinction has been made between domestic and global IPOs to analyse if effects differ. A measurement period of 2000-2010 was selected, leaving the year of implementation (2005) out of the sample. Most important findings suggest that IPO’s were overpriced in the pre-mandatory period, hence it is not surprising that underpricing increased.

Shares were likely underpriced due to the fall of the European New Markets. Nevertheless, notable is that underpricing value decreased further to zero, this might suggest that information asymmetry, a major predictor of IPO underpricing, decreases due to mandatory adoption of IFRS. Another issue analysed was difference in effect of IFRS on IPO underpricing between countries. Two proxies are used to analyse this difference. These proxies affected French and IPOs in diverse manners, hence these proxies need to be analysed in other countries. Finally, Global IPOs were less underpriced relative to domestic IPOs.

Keywords: IPO, IFRS, accounting standards, IPO underpricing, information asymmetry JEL: P45

1. Introduction

The requirement that listed firms of a lot of countries around the world have to prepare their financial statements in accordance with International Financial Reporting Standards (hereafter IFRS) has been the most significant accounting regulatory change in the past few decades (Hong, Hung & Lobo, 2014). Proponents of mandatory IFRS adoption argue that this enables investors to compare financial statements of firms operating in different jurisdictions more easily and provide more opportunities for investment and diversification (Tweedie, 2006). This might lead to more efficient capital markets.

This study focuses on mandatory IFRS adoption of German and French firms. These two countries will be researched because the economies have a big influence on the EU economy.

Prior to 2005, most of the companies in Europe applied domestic accounting standards (Armstrong, Barth, Jagolinzer & Riedl, 2010) like local General Accepted Accounting Standards (GAAP). Since 2005, in principle, all EU listed companies are required to prepare

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Nevertheless, not all countries applicate this rule since 2005 for all companies. The rule is only binding for consolidated accounts, hence all EU listed firms have to present consolidated financial statements according to IFRS. For individual financial statements, not all countries permit or require firms to present financial statements according to IFRS since 2005 (‘Financial reporting framework in Germany’, 2015).

To study market reactions of German and French firms, Initial Public Offerings (hereafter IPOs) will be analysed to determine the effect of mandatory adoption of IFRS. IPOs in global markets present a powerful setting for studying the implications of mandatory IFRS adoption because information asymmetry arising from information discrepancies between firms’

mangers and their investors is critical in determining pricing and capital flows for IPOs (Hong et al., 2014). Research about IPOs find that share prices of IPOs tend to jump substantially on the first day of trading, which is frequently referred to as ‘IPO underpricing’ (Hong et al., 2014). More importantly, a major factor explaining this IPO underpricing is information asymmetry among IPO participants (Rock, 1986). IFRS is supposed to decrease the information asymmetry that creates IPO underpricing (Rock. 1986; Armstrong et al., 2010;

Hong et al., 2014).

The research question of this thesis is as follows: How does the mandatory adoption of IFRS affect IPO underpricing of domestic and global IPOs in German and French firms, and does the effect differ between countries due to different implementation strategies of IFRS? This thesis will contribute to the literature by documenting the impact of changes in financial accounting standards on IPO underpricing in France and Germany. Additionally, an audit and an enforcement proxy created by Brown, Preiato, & Targa (2014) will be used to research how differences in audit and enforcement legislation in Germany and France affect IPO underpricing when comparing the two countries.

This thesis is structured as follows: In the introduction, the research idea is introduced and the research question is stated. The literature review will be presented after the introduction.

This review will entail the theoretical framework for this thesis, including concepts on IFRS (mandatory adoption), IPOs and underpricing, and country-specific characteristics of France and Germany concerning IFRS adoption. After the literature review, hypothesis one, two, and three will be described. After the hypotheses formulation, the research methodology will be described. The methodology section will refer to the data collection, research outline and the research method. Following the methodology, the results are shown and they will be summarized and analysed in the discussion. Finally, this thesis will conclude with the conclusion and suggestions for further research.

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2. Theory and literature review

2.1 Mandatory IFRS adoption

The EU adopted a version of IAS 39 (which specifies financial instruments: recognition and measurement) with two changes. The EU version of IAS 39 removes specific provisions related to the use of a fair value option and of hedge accounting. The EU version of IFRS thus differentiates from IFRS; therefore, some European firms disclose the fact that they use ‘IFRS as adopted by the EU’. The original standards were issued by the International Accounting Standards Committee (IASC) between 1973 and 2001. These standards are still in use, and go by the name International Accounting Standards (IAS). In April 2001, the International Accounting Standards Board (IASB) took over the IASC and the Standing Interpretations Committee (SIC). The SIC developed and invited public comment on interpretations of IASC Standards, subject to final approval by the IASC board. The IASB uses the name IFRS for the standards and continued developing standards and referred to them as IFRS. Additionally, the IASB replaced the SIC with the International Financial Reporting Interpretations Committee (IFRIC) in 2002.

All EU listed firms are required to prepare financial statements according to IFRS since 2005 (Hong et al., 2014). This adoption would result in having a common set of financial reporting standards within the EU member countries, and between EU and the other countries that have adopted IFRS. The aim was to improve the quality of corporate financial reporting by increasing their comparability and transparency, and to promote the development of a single capital market in the European Union (Doupnik & Perera. 2012). Before 2005, countries used different standards, called national General Accepted Accounting Principles (GAAP). The EU replaced the national GAAPs with IFRS with respect to preparation of consolidated financial statements by listed companies. Non-listed firms can continue using national GAAP. However, some countries (for example Denmark and Estonia) adopted a plan to converge national GAAP with IFRS. This strategy could result in having no significant differences between national GAAP and IFRS and thus no differences between financial reports between listed and non- listed firms (Doupnik & Perera, 2012).

2.2 Initial public offerings

The IPO is an important corporate event that provides an opportunity for firms to raise capital, broaden their investor base, and increase liquidity of their shares (Hong et al., 2014).

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underwriter. The underwriter firm buys the shares from the issuing company and sells them to investors. On the first day of listing, the shares usually trade at different prices than the set offer price (Rock, 1986). At the end of the day, the difference between the opening price and closing price is measured; if the closing price is higher than the opening price, the share is underpriced, hence the offer price was below the market value. If the closing price was lower than the opening price, the share is overpriced (Leite, 2004). Underpricing is costly for the issuing firm (Carter & Manaster, 1990) because this means that the firm could have made a larger amount of proceeds from the IPO. There is evidence that IPO underpricing exists around the globe (Ibbotson, 1975). For stock markets in the developed world, the level of underpricing may average between 10 and 15 percent (Goergen, Khurshed & Renneboog, 2009).

Overpricing, likewise, is costly for firms because these shares are less likely to be bought by investors as the price of these shares mostly drop on the first day of trading (Leite, 2004).

Jenkinson & Ljungqvist (2001) state a few reasons for underpricing, which are underwriters’

risk aversion, information asymmetry and the winner’s curse, insurance against litigation, and compensation to investors for revealing truthful information about the demand for new shares.

Information asymmetry arises from information differences and conflicting incentives between entrepreneurs and investors. Therefore, corporate disclosure is critical for the functioning of an efficient capital market (Healy & Palepu, 2001). Firms can provide disclosure through means of financial reports. Healy & Palepu (2001) argue that demand for financial reporting and disclosure arises also from information asymmetry. Brown et al. (2014) argue that accounting standards, and thus IFRS, have a role in reducing information asymmetry as they provide the means of communication between a firm’s managers and investors (Brown et al., 2014). Byard, Li & Yu (2011) argue that specifically mandatory IFRS adoption is to reduce the information asymmetry that causes IPO underpricing due to the improvement of financial reporting.

Improvement of financial reporting represents increased disclosure and improved comparability. Disclosure is defined by Hong et al. (2014) as “the revelation of facts and issues about measurement of facts”. Comparability is defined by Hong et al. (2014) as “the quality of information and it enables users to identify similarities and differences between sets of economic phenomena”. As a consequence of increased disclosure and improved comparability, the quality of reported financial information increases and reduces information asymmetry between participants in the IPO process.

Increased comparability of financial statements took place due to harmonization effects of IFRS. Harmonization is defined by Nobes & Parker (2004) as ‘a process of increasing the comparability of accounting practices by setting bounds to their degree of variation’. The main

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objective of harmonization hereby is to enhance comparability of accounting data. There are two types of harmonization, namely material or de facto harmonization and formal or de jure harmonization. Material or de facto harmonization refers to harmonization in the actual practice of companies and formal or de jure harmonization refers to harmonization of accounting regulations, thus laws and/or accounting standards (Tay & Parker, 1990).

Because IFRS is to reduce information asymmetry between a firms’ managers and its investors, hypothesis one is stated as follows:

H1: IPO Underpricing decreases after adoption of mandatory IFRS in 2005.

2.3 Global and domestic firms

IPOs can be split into global IPOs and domestic IPOs. For domestic IPOs, all cash proceeds are raised in the company’s home country. For global IPOs, at least some of the cash proceeds are raised outside the company’s home country (Hong et al., 2014). The effect that mandatory IFRS has on IPO underpricing, should be more pronounced for these global IPOs. Accounting diversity could be an obstacle for investors to invest in foreign markets (Bradshaw, Bushee &

Miller, 2004). As stated in the previous section, mandatory IFRS adoption for European listed firms could heavily decrease this accounting diversity. The decrease is more pronounced in global IPOs because Hong et al. (2014) argue that foreign investors are more subject to information asymmetry than domestic investors. This is because foreign investors are not familiar with accounting practices of the company they invest in because this company has different accounting regulation. When regulations are the same in the country of the investor and the country of company they are investing in, the investor can value the company better.

As stated in the precious section, information symmetry may be reduced due to mandatory IFRS adoption. For this reason, foreign investors would benefit more from the improvements concerning financial reporting resulting from mandatory IFRS adoption. However, there is also an argument countervailing this argument. Firms that complete a global IPO are typically large firms and IPOs of large firms are associated with greater media coverage and more disclosure than domestic IPOs. Therefore, the increased information disclosure caused by mandatory IFRS adoption might low effect on IPO underpricing relative to a domestic IPO. Furthermore, companies issuing global IPOs prior to 2005 sometimes have adopted IFRS voluntarily (Hong et al., 2014).

H2: The decrease in IPO underpricing holds for both global IPOs and domestic IPOs, and this effect is more pronounced for global IPOs than for domestic IPOs

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2.4 Differences in effects of mandatory IFRS adoption between countries

Many studies find that the effects of IFRS adoption are not homogenous for each country and are linked to the national institutional setting for financial reporting (Brown et al., 2014).

IFRS are principle-based standards, hence can have different effects in different countries. How firms use the standards is likely depending on their reporting incentives which are shaped by many factors. Examples of these factors are countries’ legal institutions, various market forces, firms’ operating characteristics (Brown et al., 2014).

How much improvement of financial statements due to the adoption of IFRS affects capital- market efforts, is dependent on the degree of the public company auditors’ working environment, and the degree of accounting enforcement activity by independent enforcement bodies. Hereby, enforcement bodies refer to the government authorised or appointed bodies which have been delegated the task of supervising the enforcing listed firms’ compliance with mandatory accounting standards (Brown et al., 2014). All else being equal, countries with stricter enforcement bodies and institutional structures providing stronger reporting incentives are more likely to exhibit visible capital-market efforts due to the introduction of IFRS adoption. In these countries, mandatory adopters are less likely to get away with adopting IFRS merely as a label, that is, without materially changing the reporting practices (Daske et al., 2008).

The key features of the institutional setting determining the quality of financial reporting are corporate governance, statutory audit, institutional oversight system, courts and public and press sanctions (FEE, 2001). In general, there is a range of factors, captured within the country’s culture and its legal, financial and taxation systems, that will affect the output of the financial reporting process (Brown et al. 2014).

The role of audit and accounting enforcement is important to the application of IFRS since these activities are important for improving the quality of financial reporting (Brown et al.

2014). Leuz et al. (2003) also link the quality of financial reporting to accounting enforcement.

Therefore, the focus of this research concerning differences in how IFRS affects IPO underpricing lies on these two concepts. Brown et al. (2014) constructed a proxy that is designed to capture country differences in the environment in which auditors perform their role, and secondly in the activities of national enforcement bodies in relation to promoting compliance with accounting standards. Enforcement bodies refer to the government authorised or appointed bodies which have been delegated the task of supervising and enforcing listed companies’ compliance with mandatory accounting standards (Brown et al., 2014).

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When presented in an institutional setting, there are several factors that will help secure an auditor’s objectivity. These are (1) exposure to liability, (2) quality assurance system, (3) system of professional disciplinary sanctions, and (4) damage to the brand name of the audit firm. If a country has these four concepts in in place, the auditing function is strong and effect of IFRS should be more pronounced (Brown et al. 2014).

Infrastructure for enforcement of accounting standards should be based on the following:

clear standards, timely interpretation and implementation guidance, high quality statutory audit, coordinated enforcement by security market supervisions, and effective sanctions.

Enforcement is defined by CESR (2003, p. 4) as “monitoring compliance of the financial information with the applicable reporting framework … and taking appropriate measures in case of infringements discovered in the course of enforcement.”

H3: The decrease in IPO underpricing is larger in EU listed countries with stronger enforcement and audit legislation.

2.5 France and Germany

The organisation controlling IFRS in France is the Autoritédes Normes Comptables (ANC). France has adopted IFRS as a requirement for the consolidated financial statements of all companies whose securities trade on a regulated market and for other companies of a voluntary basis. EU IAS regulation requires article application of IFRS as adopted by the EU for the consolidated financial statements of European companies whose securities trade in a regulated securities market starting in 2005. Regulated markets in France are Euronext Paris Matif, Euronext Paris Monep, NYSE Euronext Paris, and Bluenext (IFRS foundation 1, 2015).

French firms that are not required to report according to IFRS use French GAAP.

The organisation that controls IFRS in Germany is the Deutsches Rechnungslegungs Standards Committee (DRSC). In accordance with the EU Accounting Regulation, IFRS as adopted by the EU are required for the consolidated financial statements of all European companies whose debt or equity securities trade in a regulated market in Germany. The principal securities exchange in Germany (which is the Frankfurt Stock Exchange) is a regulated market to which EU IAS Regulation applies. In addition, some other exchanges in Germany are also regulated markets to which EU IAS applies, and some public securities markets are not regulated markets under EU laws. Companies that trade securities on these markets are not required to prepare financial reports under IFRS (IFRS foundation 2, 2015).

German firms that are not required to report according to IFRS use German GAAP.

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2.6.1 European New Markets

The European New Markets (EuroNMs) were launched in 1997 in order to facilitate the financing of innovative firms with potential for high growth. These firms were young and had no or little trading records, and they were usually not able to meet listing requirements of primary markets. In France, the French New Market (the Nouveau Marché) was opened in February 1996, Germany opened the Neuer Markt in March 1997. Both of the EuroNMs were successful, also compared to the other three EuroNMs, which are located in the Netherlands, Belgium, and Italy. Due to difficulties in harmonizing different sets of listing rules, existence of different national regulators and inefficient cross-border trading, EuroNMs ended the partnership in December 2000. This resulted in a drastic decline in number of IPOs on the New markets (Goergen et al., 2009). Due to the European New Markets and their collapse, many IPOs in France and Germany were thought to be overpriced in the pre-mandatory IFRS adoption period (2000-2004).

3. Methodology

The IPOs to be researched are sampled from Germany and France, two countries that mandated IFRS after 2005 and have the required country level data. The focus is on the four years before mandatory IFRS adoption (2000-2004) and the four years after mandatory IFRS adoption (2006-2010). The year 2005 is excluded to avoid potential confounding effects during this transition year.

The companies that issued an IPO in one of the two time periods have been selected from the ZEPHYR database. This database provides information on the issuer, issue date, deal type, deal value, offer price and first day closing price.

The sample consists of companies with an IPO between 2000-2004 (referred to as ‘pre- period’) or 2006-2010 (referred to as ‘post-period’, in one of the countries Germany or France.

The IPO has to be completed and confirmed. This gives us a total sample of 967 IPOs. Table 1 gives a more detailed overview of these IPOs.

Country Pre-period (2000-2004) Post-period (2006-2010)

Germany 185 323

France 208 251

Total 393 574

Table 1; Number of IPOs

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Some of these observations lack information that is critical for this research, therefore these observations are deleted from the sample. Observations were deleted due to one of the following reasons: 306 of these observations were not included because offer price is not available, another 80 were not included because the first day closing price is not included; offer price and first day closing price are critical variables for calculating underpricing. Another two were deleted because deal value was not available. Another 14 observations did not have an IPO completion date, and four observations retrieved from the ZEPHYR database did not have an IPO date in the appropriate time period (one in 1999, three in 2005). This leaves us with a sample of 561 observations. Lastly, 21 other observations were deleted because the IPO underpricing percentage is very high (above 300%), and can be described as outliers. This led to a final sample of 540 observations, as indicated in table 2.

Country Pre (2000-2004) Post (2006-2010)

Germany 113 128

Domestic 107 121

Global 6 7

France 102 197

Domestic 100 191

Global 2 6

Total 215 325

Table 2: IPOs Selected in Sample

In table 2, a distinction has been made between domestic and global IPOs. This differentiation was made to find an answer for hypothesis 2. The sample includes observations for both countries in every measurement year, apart from 2003, in which the sample only includes IPOs in France. It is remarkable that the sample contained a relatively large amount of IPOs in the year 2000, and contains a relatively small amount of IPOs in the years 2002, 2003, and 2004.

4.1 Regression formulas

A regression analysis for IPO underpricing will be used for both German and French data.

Hereafter, a regression containing data of both countries will be used to analyse the combined effect of mandatory IFRS adoption in both countries on IPO underpricing. This regression will prove which of the countries has more statistical chance of IPO underpricing. Furthermore, a gap analysis will be performed to analyse the difference means of IPO underpricing between

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France and Germany. For the gap analysis, a test of equality between means will be used. The variables that are selected are based on Hong et al. (2014). Apart from that, audit proxy and enforcement proxies, created in an article written by Brown et al. (2014), will be used to analyse the difference in effect of IFRS underpricing between the two countries, and to acquire findings that can say something about hypothesis two.

The formula below (1) is used for the regression analysis for both French and German datasets.

𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔 = 𝛽_-+ 𝛽_/ 𝑃𝑜𝑠𝑡 + 𝛽₄ 𝐺𝑙𝑜𝑏𝑎𝑙 𝐼𝑃𝑂 𝑑𝑢𝑚𝑚𝑦 + 𝛽_> 𝐿𝑜𝑔(𝐷𝑒𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 ) + 𝛽_D(𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑐𝑟𝑖𝑠𝑖𝑠 𝑑𝑢𝑚𝑚𝑦) + 𝛽_F 𝐴𝑢𝑑𝑖𝑡 𝑝𝑟𝑜𝑥𝑦 + 𝛽_I 𝐸𝑛𝑓𝑜𝑟𝑐𝑒𝑚𝑒𝑛𝑡 𝑝𝑟𝑜𝑥𝑦 +

𝛽_L 𝐼𝑃𝑂 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝛽_M(𝑇𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 𝑑𝑢𝑚𝑚𝑦) + 𝛽_P 𝑌𝑒𝑎𝑟 + 𝜖 (1) The formula below (2) is used for the regression analysis including both France and Germany.

𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔 STUVWX,ZXT[UV\ = 𝛽_-+ 𝛽_/ 𝑃𝑜𝑠𝑡 + 𝛽₄ 𝐺𝑙𝑜𝑏𝑎𝑙 𝐼𝑃𝑂 𝑑𝑢𝑚𝑚𝑦 + 𝛽_> 𝐿𝑜𝑔(𝐷𝑒𝑎𝑙 𝑣𝑎𝑙𝑢𝑒) + 𝛽_D 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑑𝑢𝑚𝑚𝑦 + 𝛽_F 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑐𝑟𝑖𝑠𝑖𝑠 𝑑𝑢𝑚𝑚𝑦 + 𝛽_I 𝐴𝑢𝑑𝑖𝑡 𝑝𝑟𝑜𝑥𝑦 + 𝛽_L 𝐸𝑛𝑓𝑜𝑟𝑐𝑒𝑚𝑒𝑛𝑡 𝑝𝑟𝑜𝑥𝑦 + 𝛽_M 𝐼𝑃𝑂 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 +

𝛽_P(𝑇𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 𝑑𝑢𝑚𝑚𝑦) + 𝛽_/- 𝑌𝑒𝑎𝑟 + 𝜖 (2)

4.2 Variables

In this section, the variables used in the regression analysis will be explained. First, the dependent variable will be explained. Secondly, the variables that contain predictors. These are the variables that have relevance to the hypotheses and answering the research question.

Finally, the control variables will be explained. The control variables are divided in two categories, being firm-level control variables and country-level control variables.

Dependent variable:

IPO underpricing: Underpricing is calculated as the percentage of price change from the offer price to the secondary market closing price (Boulton, Smart, Zutter, 2011). The formula describing this formula is depicted below (3).

𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔 =^_T`a bU\ [UTcXa Wde`_Vf gT_WX

e^^XT gT_WX − 1 (3)

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Variables of interest:

Post: a dummy variable equal to 1 if company has an IPO in the post mandatory IFRS adoption period. IPO underpricing is expected to decrease in the post-mandatory period.

Therefore, this variable is expected to have a negative sign.

Global IPO dummy: a dummy variable equal to 1 if all of IPO shares are sold outside of the home country of the firm going to public. For global IPOs, it is expected that the decreased effect in IPO underpricing is more pronounced than for domestic IPOs.

Enforcement proxy. The effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture country differences but these proxies are deficient since they seldomly focus explicitly on factors that affect how compliance with accounting standards is promoted through the activities of independent enforcement bodies. Brown, Preiato and Targa (2014) developed a proxy to calculate the degree of accounting enforcement activity by independent enforcement bodies.

This variable is included to analyse how the degree of enforcement activity affects IPO underpricing. The higher the value for this variable, the stronger the enforcement in the country. This coefficient is expected to have a positive sign.

Country 2002 2005 2008

France 19 19 16

Germany 5 19 21

Source: Brown et al. (2014)

The proxy values calculated for 2002 are used for the years 2000, 2001, 2002 and 2003. The proxy values calculated for 2005 are used for 2004 and 2006. The proxy values calculated for 2008 are used for 2007, 2008, 2009, and 2010. The items included by Brown et al. (2014) in the enforcement proxy are stated in Appendix A2.

Audit proxy: Brown et al. (2014) argue that also audits have a significant effect on the effectiveness of IFRS adoption. Therefore, this proxy is also included in this research. Included to control for the strength of auditing enforcement in a country. This variable is expected to have a positive sign.

Country 2002 2005 2008

France 15 29 29

Germany 13 23 23

Source: Brown et al. (2014)

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The proxy values calculated for 2002 are used for the years 2000, 2001, 2002 and 2003. The proxy values calculated for 2005 are used for 2004 and 2006. The proxy values calculated for 2008 are used for 2007, 2008, 2009, and 2010. For the last two proxy values, no effect will be found because the proxy values for 2005 and 2008 are the same in both countries. The items included by Brown et al. (2014) in the audit proxy are stated in Appendix A2.

Control variables (firm-level)

Deal value: Concerns the deal value. Calculated as the logarithm of the consideration paid for the actual stake acquired. Deal value is also referred to in the literature as ‘proceeds’. This control variable is included to capture the degree of asymmetry of an IPO.

Financial crisis dummy: Dummy variable for the financial crisis. Because the financial crisis took place during the time of the measurement period, a dummy for the financial crisis was also implemented in the model. Using the dummy, we can measure how the financial crisis affected IPO underpricing. The IPOs that were completed during 2009 have a value of 1 for the financial crisis dummy.

Technology dummy: Dummy variable which takes a value of 1 if the the observation involves an IPO of a technological firm. Technology industries are defined based on NACE rev 2 codes. Codes defined as being ‘technological’ industries are indicated in the appendix A3. Technology firms are included as a dummy variable because the rise of technological firms took place during the measurement period. Investors might have had increased difficulties in estimating the value of IPOs concerning technological firms. Therefore, this dummy variable is included.

Year: Included to control for time trend. Has a value of 0 for 2000, 1 for 2001, 2 for 2002, 3 for 2003, 4 for 2004, 6 for 2006, 7 for 2007, 8 for 2008, 9 for 2009, and 10 for 2010.

Control (country-level)

IPO activity: ratio of total number of IPOs in the issue year divided by the number of listed domestic companies for either France or Germany as of 2011. The number of listed companies in France and Germany are 893 and 670 respectively (World Data Bank. 2015). It is included to control for the time trend in IPO volume.

Year France Germany

2000 0,127659574 0,207462687

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2001 0,059350504 0,040298507

2002 0,019036954 0,01641791

2003 0,006718925 0,001492537

2004 0,020156775 0,010447761

2006 0,100783875 0,205970149

2007 0,088465845 0,144776119

2008 0,033594625 0,070149254

2009 0,024636058 0,02238806

2010 0,033594625 0,03880597

Source: World data bank

Country dummy: value is 0 for German IPOs and value is 1 for French IPOs. This variable is only included in formula 2, which includes both France and Germany.

4. Results

The analysis of IPO underpricing starts with an analysis of means of IPO underpricing in France and Germany. The results of this analysis are depicted in table 3.

Total France Germany

Domestic Global Domestic Global

n (firms) 541 291 8 228 13

Mean (underpricing) -0.1165 -0.0439 0.0160 -0.2028 -31.27 Pre-period mean -0.3684 -0.2334 -0.2979 -0.4804 -0.6224 Post-period mean 0.0488 0.0539 0.1260 0.0428 -0.0472 Change (post-pre) 0.4172 0.2873 0.4239 0.5232 0.5752

Table 3: mean values IPOs

Table 3 implies out that IPOs were not underpriced but actually both overpriced in the pre- mandatory period. This was likely due to the rise of the technological sector in France and Germany, and due to the fall of the New European market exchanges in both countries in the post period. The terms ‘Domestic’ and ‘Global’ stand for either a domestic or global IPO. As seen in table 3, domestic IPOs occur more frequently than global IPOs.

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4.1 Regression German data

For the regression of German data, formula 1 is used. The regression formula can be found in the methodology section. The results of the regression are depicted in table 4.

Dependent Variable: Underpricing

Variable Coefficient Standard Error t-statistic P-value

C 0.369777 0.617607 0.598726 0.5500

Post 0.888332 0.258424 3.437494 0.0007*

Global IPO -0.109838 0.170123 -0.645635 0.5192

Enforcement 0.078430 0.048335 1.622641 0.1060

Audit -0.030205 0.060231 -0.501486 0.6165

Log(Deal value) -0.027240 0.015203 -1.791815 0.0745***

Financial crisis -0.092659 0.245399 -0.377585 0.7061 IPO activity -2.926614 0.721762 -4.054817 0.0001*

Technology dummy -0.145897 0.056320 -2.590515 0.0102**

Year -0.191228 0.059958 -3.189364 0.0016*

Total model Observations 238

R-squared 0.394660

Ad. R-squared 0.370765

P-value 0.000000 C denotes the regression intercept

* significant at 1%

** significant at 5%

*** significant at 10%

Table 4; German IPOs

The variable ‘post’ denoting if the IPO was before or after mandatory IPO adoption has a positive coefficient. This does not match hypothesis 1. Nevertheless, the average of IPO underpricing in the pre-period indicates that IPOs were overpriced. The average in the post- period lies closer to zero than the average in the pre-period, hence IFRS adoption may have decreased information asymmetry.

The global IPO dummy has a negative sign which indicates that if an IPO is global, underpricing decreases. This is in line with hypothesis 2 which stated that both global and domestic IPOs decrease after mandatory adoption of IFRS, but the effect is more pronounced for global IPOs. The variable global IPO has low statistical significance.

The enforcement and audit proxy values in Germany both increased during the years, but only the audit proxy has a negative coefficient and affects underpricing negatively, and thus

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decreases it. The enforcement proxy affects underpricing positively and thus increases IPO underpricing, this is not in line with hypothesis 3. Both variables have low statistical significance.

The technology dummy has a negative coefficient which means that IPOs in the technology industry are less underprized than IPOs in non-technology industries. The financial crisis dummy has a negative coefficient which implies that IPOs during the financial crisis (IPOs in the year 2009) are less underprized. This variable has low statistical significance.

R-squared of the model has a value of 0.395, implying that the variables included in the model explain 39.5% of IPO underpricing in Germany. This is evidence that the model explains underpricing well for German IPOs.

4.2 Regression France

For the regression of France, formula 1 is used. The regression formula can be found in the methodology section. The results of the regression are depicted in table 5.

C -2.207438 0.499871 -4.416013 0.0000*

Post 0.769739 0.181076 4.250910 0.0000*

Global 0.186039 0.204650 0.909059 0.3641

Enforcement -0.002007 0.008731 -0.229834 0.8184

Audit 0.123133 0.028851 4.267845 0.0000*

Log(Deal value) -0.010097 0.006628 -1.523340 0.1288 Financial crisis -0.200950 0.096562 -2.081050 0.0383**

IPO activity -2.556619 0.709427 -3.603779 0.0004*

Tech -0.039250 0.041769 -0.939698 0.3482

Year -0.022299 0.029749 -0.749592 0.4541

R-squared 0.203757

* significant at 1%

Table 5; French IPOs

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In the model for France, ‘post’ again has a positive coefficient, meaning that underpricing did increase for French IPOs as well. Also for France, the mean values of French IPOs in table 3 indicate that IPOs were overpriced in the pre-mandatory period and therefore the increasing underpricing does not directly indicate that IFRS did not have a positive impact on underpricing.

The global IPO dummy has a positive coefficient, which indicates that if an IPO is global, underpricing increases. This finding is not in line with hypothesis 2. This variable has low statistical significance.

The audit proxy is significant and explains underpricing. The coefficient is positive which means that underpricing increases as the enforcement proxy increases. This does not match the expectations of hypothesis 3. The coefficient for the enforcement proxy is negative, which means that a higher value of the audit proxy decreases underpricing. This is in line with the expectations of hypothesis 3 although the enforcement proxy has low statistical significance.

R-squared of the model has a value of 0.204, implying that the variables included in the model explain 20.4% of IPO underpricing in France. The model has lower statistical power for French IPOs relatively to German IPOs.

4.3 Regression France and Germany

The regression including both France and Germany is tested using formula 2, which is defined in the methodology section. The outcomes of the regression are depicted in table 6.

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C -0.339996 0.125915 -2.700209 0.0072*

Post 0.593304 0.137887 4.302829 0.0000*

Global dummy -0.011790 0.086645 -0.136076 0.8918

Enforcement 0.017509 0.003961 4.419881 0.0000*

Audit 0.014974 0.008082 1.852766 0.0645***

Log(Deal value) -0.011503 0.006291 -1.828405 0.0681***

Financial crisis -0.143813 0.093510 -1.537937 0.1247

IPO activity -1.749648 0.444186 -3.938997 0.0001*

Country dummy -0.123780 0.061271 -2.020228 0.0439**

Year -0.068788 0.026539 -2.591966 0.0098*

Tech dummy -0.077576 0.034123 -2.273419 0.0234**

R-squared 0.302416

* significant at 1%

*** significant at 10%

Table 6; German & French IPOs

The variable ‘post’ denoting if the IPO was before or after mandatory IPO adoption has a positive coefficient. This does not match hypothesis 1.

The global IPO dummy has a negative coefficient which indicates that if an IPO is global, this decreases underpricing. This variable is not statistically significant. The coefficient of this variable does correspond to hypothesis 2.

Enforcement has a slightly positive coefficient which means that underpricing increases as enforcement increases for Germany and France. Enforcement is significant at 1%. The same applies to the audit proxy for which the coefficient is slightly positive which means that underpricing increases as audit legislation increases in France and Germany. The audit proxy has no statistical significance. The audit and enforcement proxy statistical outcomes do not correspond to the expected outcomes of hypothesis 3.

The financial crisis dummy coefficient has a negative sign, implying that IPO underpricing decreased in the period defined as financial crisis. The average percentage for this variable is - 1.94%, hence these shares were overpriced. This variable has low statistical significance. For

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the country dummy, France was given the value of 0 and Germany was given the value of 1.

The country dummy has a negative sign which means that when an IPO takes place in Germany, underpricing decreases. The financial crisis dummy has a negative coefficient, implying that IPO underpricing decreases in the year of the financial crisis (2009).

R-squared has a value of 0.307, meaning that the model explains 30.7% of IPO underpricing in France and Germany. This is evidence that the regression model explains underpricing in France and Germany well.

4.4 Regression differences between France and Germany

To test if the means of French and German IPO underpricing are equal, a test for equality of means between series is performed. The means of IPO underpricing are compared per year and for the whole sample of France and Germany. Because the sample has an unequal number of observations altogether and per year, the sample has been equalized. The hypotheses that were tested using the following hypothesis.

𝐻0: 𝜇_STUVWX = 𝜇_ZXT[UV\

𝐻1: 𝜇_STUVWX ≠ 𝜇_ZXT[UV\

Test for equality of means between series

Year Included

observations

Mean IPO underpricing t-test

France Germany Value Probability

2000 42 -0.382197 -0.669518 2.481137 0.0151

2001 19 -0.212459 0.310128 0.904496 0.3717

2002 5 -0.186243 -0.191423 0.019815 0.9847

2003* NA -0.155172 NA NA NA

2004 6 -0.009947 -0.010921 0.004106 0.9968

2006 67 0.076609 -0.004415 1.840728 0.0679

2007 41 0.038772 0.121523 -0.887916 0.3772

2008 4 -0.100907 0.252728 -2.540713 0.0440

2009 3 -0.244959 -0.013280 -0.935840 0.4023

2010 10 0.083694 -0.145193 1.981385 0.0630

Total 241 -0.063445 -0.211084 3.561027 0.0004

* 2003 is not included in the test because there are no observations included in the sample that involve a German IPO in 2003

Table 7; test for equality

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The results of the analysis are depicted in table 7. The results of the comparison between means of the total sample are depicted in the line ‘total’. For the years in which the p-value is smaller than 0.05, the null hypothesis of equality between means is rejected and we can assume that the means between France and Germany are unequal. For the years 2000 and 2008, the p- value is smaller than 0.05, therefore the null hypothesis is rejected. For the years 2006 and 2010 the p-value is smaller than 0.10, thus the null hypothesis is partly rejected.

For the total sample, the means of all French and German IPOs are statistically very unequal.

This is statistically significant at 1%. Therefore, the null hypothesis of equal means can be rejected and it can be assumed means are unequal.

4.5 Robustness tests

Several robustness tests have been performed to verify the robustness of the data. The regression analyses in the previous section are performed several times, each time increasing the significance of the model by adding more data and modelling the data. Furthermore, the results of tests indicating robustness will be presented next. These tests include tests excluding IPOs concerning technology industry; including only technology industry; and modifying the financial crisis dummy.

4.5.1 Excluding technology firms

The regression analyses are also performed excluding the technology firms that had an IPO in the measurement period. Firms defined as being ‘technology firms’ based on their NACE reverence 2 codes, the codes identified as technology industries are depicted in the appendix A3. This robustness test is performed because these firms might have had a great impact in the measurement period and might have skewed the outcomes of the research. The industries (according to NACE reverence 2 codes) identified as ‘technology firms’ are shown in the appendix. When excluding IPOs in the technology industry, the sample consists of 354 observations, with 136 in the pre-period and 218 in the post-period. The regression outputs when excluding technology based firms from the sample are depicted in table 8.

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C -0.256834 0.168674 -1.522665 0.1288

Post 0.651034 0.186589 3.489129 0.0005*

Global IPO -0.016879 0.115533 -0.146100 0.8839

Enforcement 0.024437 0.005444 4.489239 0.0000*

Audit 0.008442 0.010733 0.786607 0.4321

Log(Deal value) -0.012413 0.008354 -1.486006 0.1382 Financial crisis -0.112029 0.126685 -0.884307 0.3772

IPO activity -1.756000 0.592801 -2.962208 0.0033*

Country dummy -0.136684 0.082580 -1.655185 0.0988***

Year -0.083829 0.034506 -2.429385 0.0156**

R-squared 0.234968

* significant at 1%

*** significant at 10*

Table 8; excluding technology firms

When IPOs in the technology industry are excluded, the mean IPO underpricing percentage of the total sample is -9.39%. The mean underpricing percentage is -30.60% in the pre-period and 5.03% in the post-period. Meaning, even when excluding IPOs from the technology industry, shares are still overpriced in the pre-mandatory period. For that reason, the variable

‘post’ has a positive coefficient.

The dummy variable ‘global IPO’ has a negative coefficient, in line with hypothesis 2, but still has very low statistical significance. The proxy variables audit and enforcement still have negative coefficient, similar to the regression including technology firms. The audit proxy has lower statistical significance when excluding technology firms.

The R-squared of this model has a value of 0.235, meaning that the model explains IPO underpricing for non-technological IPOs in France and Germany for 23.5%.

4.5.2 Only technology firms

To see how IPOs in the technological industry were affected concerning IPO underpricing by introduction of IFRS, a regression analysis is performed on the observations that involved an IPO in the technological industry. The mean value of IPO underpricing of these companies

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is -17.36%. The mean value of IPO underpricing in the pre-period is -47.74% and in the post- period 4.58%. The results of this regression are depicted in table 9.

C -0.627758 0.167009 -3.758823 0.0002*

Post 0.499416 0.182780 2.732341 0.0069*

Global -0.010545 0.116897 -0.090207 0.9282

Enforcement 0.005615 0.005130 1.094481 0.2752

Audit 0.029661 0.011177 2.653773 0.0087*

Log(Deal value) -0.007476 0.008538 -0.875584 0.3824 Financial crisis -0.145550 0.121715 -1.195828 0.2334

IPO activity -1.730722 0.600617 -2.881573 0.0044*

Country dummy -0.098508 0.081926 -1.202408 0.2308

Year -0.053429 0.037731 -1.416045 0.1585

R-squared 0.523816

* significant at 1%

Table 9; technological IPOs only

The coefficients of the variables have similar coefficients compared to the original regression involving the complete sample of French and German IPOs. Nevertheless, it is remarkable that the R-squared of this model (52.4%) is significantly higher than the R-squared of the original model.

4.5.3 Financial crisis

In the regular model, the dummy for the financial crisis applies to IPOs completed in the year 2009. The financial crisis actually started in October 2008. Six IPOs took place in the period between the October 1^st 2008 and December 31^st 2008. A sensitivity analysis is performed by performing a new regression in which a dummy is used that has a value of 1 for IPOs that took place between the first of October in 2008 and 31^st of December in 2009. In the original variable, average overpricing was 1.03%; underpricing averages at 1.18% when using the alternate version.

Replacing the original financial crisis dummy resulted in a slightly increased coefficient (increase of 0.0189) and the significance of the financial crisis dummy has decreased a bit, the

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Adjusting the financial crisis dummy also adjusted the whole model slightly. The R-squared increased slightly, by 0.004%. The output of the complete regression can be found in Appendix A4.

4.6 Final model

Finally, a model has been drawn that depicts all the relevant variables. In this model, only the dependent variable and variables that are statistically significant are taken into account. The formula of the final model is presented in formula 4. Contrary to the original model, the variables ‘global IPO’ and ‘financial crisis dummy’ have been left out of the equation because they were not significant in the regression containing the complete sample.

𝑈𝑛𝑑𝑒𝑟𝑝𝑟𝑖𝑐𝑖𝑛𝑔 STUVWX,ZXT[UV\ = 𝛽_-+ 𝛽_/ 𝑃𝑜𝑠𝑡 + 𝛽₄ 𝐿𝑜𝑔(𝐷𝑒𝑎𝑙 𝑣𝑎𝑙𝑢𝑒) + 𝛽_> 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 𝑑𝑢𝑚𝑚𝑦 + 𝛽_D 𝐴𝑢𝑑𝑖𝑡 𝑝𝑟𝑜𝑥𝑦 + 𝛽_F 𝐸𝑛𝑓𝑜𝑟𝑐𝑒𝑚𝑒𝑛𝑡 𝑝𝑟𝑜𝑥𝑦 +

𝛽_I 𝐼𝑃𝑂 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 + 𝛽_L(𝑇𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 𝑑𝑢𝑚𝑚𝑦) + 𝛽_M 𝑌𝑒𝑎𝑟 + 𝜖 (4)

5. Discussion

5.1 IPO underpricing

The most remarkable finding of this research is that IPO underpricing did not decrease in the post-mandatory period. By looking at the averages of IPO underpricing, one can already notice that. In both France and Germany, IPOs are overpriced in the pre-period. This was due to the collapse of the European New Markets that were very big in especially France and Germany in the years before 2000. After the year 2000, these markets collapsed due to the rise of the technological industry. A large amount of IPOs was completed in this industry. For investors, it was difficult to price these IPOs, because they did not know the value of these IPOs. Hence there was more uncertainty for these IPOs. Some literature argues that IPO overpricing has negative effects for long run performance of firms (Ritter & Welch, 2002), but overpricing could also have been an objective of these firms. Some literature argues that firms intentionally overprice IPOs (Leite, 2004) because investors are not likely to sell these shares during the first days again.

One of the objectives of IFRS has been to reduce information asymmetry between firms and investors. Although this information asymmetry did not reduce IPO underpricing compared to the previous period, it did reduce it further towards a minimum. The average IPO underpricing