1

Europe’s Second Markets for Small Companies

Silvio Vismara a∗

, Stefano Paleari a, Jay R. Ritter

b

November 8, 2011

Abstract

European stock exchanges have repeatedly opened second markets to list small companies. We

explain the motivation for the creation of these second markets, and why many of them have failed.

We find that the probability of being a takeover target is higher for second-market firms, and 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 been successful

in providing 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.

Keywords: stock exchanges, second markets, financial regulation, IPOs, AIM, London Stock

Exchange.

JEL classifications: G15, G30.

a Department of Economics and Technology Management and CCSE, University of Bergamo, Italy,

and University of Augsburg, Germany

b Warrington College of Business Administration, University of Florida, USA

* We like to thank Arif Khurshed, Meziane Lasfer, Erik Lehmann, Michele Meoli, Enrico Pellizzoni, Sheridan Titman,

a number of stock exchange officials, and seminar participants at the University of Bergamo, University of Augsburg,

and Chinese University of Hong Kong for helpful comments. Andrea Signori provided superb research assistance.

Contact author: silvio.vismara@unibg.it.

2

1. Introduction

Most of the stock exchanges in Europe are organized 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 ones. In the US, Nasdaq has

not followed this pattern, at least partly due to 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 an exchange on which

domestic operating companies want to list. 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, in

the late 1990s, Nasdaq set up a European market, but failed to attract many listings. Many major

Asian countries also have second-tier markets aimed at small companies, including China’s

Shenzhen ChiNext and Hong Kong’s GEM.

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 primary markets of European stock exchanges. The early listing of these stocks could be viewed

as a positive net present value strategy, however, if enough of these stocks grow and generate large

transaction fee revenues in the future, and if some of these successful companies would not have

subsequently listed on the same stock exchange without this early opportunity to do so. Listing such

small firms might benefit the stock exchanges in terms of providing opportunities for portfolio

diversification to their investors. Most importantly, however, a reason for setting up these markets

relies on their role in attracting firms that otherwise would not go public at the same stage of their

life cycle. These markets are indeed typically meant to meet the needs of small and young

companies that would not be eligible to list on the main markets.

With less stringent listing requirements, second markets have satisfied the appetite for new listings

of the stock exchanges. During 1995-2009, only 845 out of 3,755 IPOs in the four stock exchanges

in Europe that we focus on took place on main markets, with second tier markets accounting for the

remaining 2,910 IPOs. It is therefore of interest to take a firm’s perspective and 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.

3

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. In contrast with an average 3-year buy-and-hold abnormal

return (BHAR) of +12.3% for main market IPOs, the average 3-year BHAR of 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, there have been very few second market IPOs that

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 been very heavily towards the AIM.

All of the second markets existing in 2011 that we focus on are organized 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 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 secondary markets, (3) document the long-run abnormal

returns and delisting rates for main and second market IPOs, (4) analyze the choice of switching

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

Historically, main board listing requirements have emphasized accounting thresholds, such as

minimum asset size or years of profitability. In the past twenty years, the listing standards for the

second markets have instead emphasized disclosure and corporate governance requirements. While

the London Stock Exchange has remained committed to a two-tier structure based on certain

minimum standards, stock exchanges in Continental Europe developed different models of

segmentation through time. We identify three models for such second markets: Sequential,

Sectorial, and Demand-side segmentation, as illustrated in Table 1.

[INSERT TABLE 1 HERE]

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The first model of segmentation is a sequential one, with small companies expected to go public on

second-tier ‘seasoning’ markets and, in case of success, move later to the main market. The

regulatory regime of these markets is meant to provide small and medium-size enterprises with the

means to finance growth and to allow them to learn to experience life as a public company without

the full discipline of the main market of a national stock exchange. 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 (e.g., the Second Marché of the 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 Nineties, these New Markets formed a pan-European network named Euro.NM with

a Markets Harmonization Agreement that established similar regulations. Its members 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 grouping 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 is typically associated

with London’s popular Alternative Investment Market (AIM). These markets are not officially

regulated markets, as defined by the European Financial Services Directive. In particular, the main

effect of this categorization 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

the prospectus when the listing does not involve a public offer1. Since inclusion on these markets

1 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 for any security admitted to listing, thus being included in the Official List.

On the other hand, since the AIM is not a Recognized Investment Exchange, neither the UKLA nor the LSE are

required to approve the prospectus when the listing does not involve a public offer, relying 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, requiring any issuer admitted to trading on a regulated market to produce a UKLA-

approved prospectus. To preserve this different regulatory regime, the LSE changed the status of the AIM from

regulated market to “Exchange-regulated” market (a multilateral trading facility) in 2004. As compulsorily reported on

the front page of the Admission Document of companies listing on the AIM through a placing: “The rules of AIM are

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does not constitute listing on an official market, the principal regulatory requirements for organized

markets do not apply to them and no publication of a prospectus is required if it is a “non-public”

offering intended for qualified institutional buyers, in which case a shorter admission document is

substituted.

This model of market organization, launched with the AIM in 1995, has been mentioned 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, or the MAC in Italy.

This type of exchange-regulated market is now the model adopted for the second markets by all of

the stock exchanges in Europe that we focus on.

3. The IPO market in Europe

In this paper, we analyze 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. Namely, for France we use the Paris

Bourse until 2004 and Euronext afterwards (including 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 categorizes the population of IPOs according to the stock exchange and to the market type

they choose. 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. With the exception of the AIM, no other market has a significant number of IPOs by

foreign companies2. Also, the exception of the AIM does not involve any special attractiveness at

the expense of the other ‘mature’ stock markets of Continental Europe3. It is therefore not the case

less demanding than those of the Official List of the UK Listing Authority. It is emphasized 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”. 2 We count only 36 companies from our sample countries that 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, or on the AIM during the

second ‘hot’ period. Similar minor exceptions involve Austrian and Swiss companies going public in Germany. 3 The AIM is the only European market that has been able to attract 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. Moreover, 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 or in other countries with historical ties to Britain (Australia, Canada, Hong Kong, and USA) or Israel.

The contribution to the flow of IPOs on the AIM by any other country can be counted on the fingers of two hands.

6

that a secondary 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 markets4.

IPOs tend to cluster in time and in industry, with hot markets with many new issues followed by

cold markets with lower issuing activity5. Cycles in IPOs are particularly evident in second markets.

Different types of second markets have been launched and closed after a few years. As a whole,

however, their ability to attract new companies has been successful in hot periods and has rapidly

collapsed in cold ones, as shown in Figure 16.

There have been two ‘hot’ periods for IPOs during our 15-year sample period, each accounting for

almost one third of the 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 IPOs out of a total of 603 IPOs

in Germany in the period 1995-2009), even though it was dedicated to tech stocks and only existed

for less than seven years. In the year of its launch (1997), 11 of 16 listed companies at the Neuer

Markt declared that the good image of the market was the main motive for a listing in this market

(Theissen, 1998). The Neuer Markt soon became very prestigious, and 282 companies went public

on this market 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 before it closed in 2003.

4 For this reason, throughout the paper we consider country effects, but do not address the issues of international

attractiveness. We restrict the firm choice to the listing among different stock markets (i.e. secondary vs main market)

within the same national exchange. The aim is to identify the motives and the consequences of the choice of a second-

tier market. 5 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 capitalize on temporary mispricings. 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) and, in particular, they

play an important role in the decision and timing to go public (Ritter and Welch, 2002). Ritter (2011) addresses 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

organizations. 6 The number of IPOs on the main markets in our sample is on average 56 per year, varying between only 3 in 2009 to a

maximum of 108 in 2000. New markets have an average of 33 IPOs, but with no IPOs in most of the years. The number

of yearly IPOs in seasoning markets varies from 0 to 73, whereas on exchange-regulated markets the variation is from

16 to 353.

7

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 to qualified institutional buyers, and are equivalent to private placements. This

is the case for 1,572 pure private placings out of a total of 1,642 IPOs on the AIM7. Since 2005, 38

private placings have been used also by companies going public on the exchange-regulated markets

in continental Europe8.

[INSERT TABLE 2 AND FIGURE 1 HERE]

4. The choice to go public on second markets

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 that of the companies going public on second markets. First, companies on the main

markets are larger and older, as expected. However, there are some differences according to the

model of the second-tier market, with companies going public on seasoning markets being almost

as old as companies listing on the main markets. Among the second markets, new markets were the

ones associated with higher capital raising at the IPOs. Despite the limited size of their companies

(median pre-issue assets of 11.5m €), Panel A of Table 3 reports that the IPO proceeds were

substantial (28.6m € in median). As reported in Panel B of Table 3, such high proceeds at the IPO

are associated with a high level of underpricing (11.1% in median) and of valuations (Tobin’s Q of

3.32 in median)9.

7 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. 8 9 of these private placing IPOs are on the Italian market Expandi, which was a ‘seasoning’ EU-regulated market until

it was transformed into an exchange-regulated market in December 2007. 9 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 the book value of assets and the market value at offer prices of common stock less the book

value of common stock. Industry specificity must, however, be taken into account as by definition the new markets

were dedicated to companies in high tech industries. This means that new markets’ IPOs are concentrated in a few high

Q industries. 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 and is calculated annually for each 1-digit ICB industry (Industry Classification

Benchmark). New markets show higher Industry Q. 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.

8

Finally, we investigate the role of venture capital in taking the companies public. The main

evidence 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. In particular, exchange-regulated markets seem to be perceived as a valid alternative to

venture funding, allowing firms to not need mezzanine financing before listing. Some young firms

may view the access to these markets as a sort of ‘public venture market’ to finance their growth

projects, as an alternative to VC financing10

.

[INSERT TABLE 3 HERE]

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 are obliged to in their

selection because they do not fulfill the more stringent listing criteria required by the 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 admission criteria are similar at leading European stock

exchanges and are very similar to those that apply at most of the major stock exchanges around the

world. There are basically three ‘measurable’ requirements to have: (1) a record of audited financial

statements (3 years), (2) minimum market capitalization (from 700,000 £ on the Official List in

London to 50m € on the Eurolist) and (3) free float rules (25%)11

.

[INSERT TABLE 4 HERE]

In addition to the main markets, there are the ‘exchange-regulated’ markets. Their unregulated

nature, according to EU directives, makes them autonomous from the national listing authorities

(except in the case of a public offer). In terms of the time required for admission to these markets, it

is possible to create and list a new company within a few weeks. There are no rules regarding the

10

Of course, the extent of these patterns is largely dependent on country specificities. For instance, the proportion of

VC-backed IPOs is larger on the London Stock Exchange, whatever market is considered; whereas companies in Italy

are typically more mature when they decide to go public. 11 There are other ‘non-measurable’ requirements that can even be a more important barrier to entry. These involve

different levels of compliance and on-going obligations regarding disclosure and transparency.

9

minimum number of shareholders, unlike, for example, the New York Stock Exchange and

NASDAQ, which do not have percentage public float requirements.

We investigate whether companies going public on the exchange-regulated markets would meet the

listing requirements of the respective main markets. Specifically, in Panel B of Table 4 we estimate

the number of these companies that did not meet them. Out of 2,144 IPOs on exchange-regulated

markets in the period 1995-2009, we find that 1,511 companies (70.5% of the total) could not go

public on the respective main market. Only 603 IPOs on exchange-regulated markets fully satisfied

the listing criteria imposed by the main markets and opted for the exchange-regulated markets. We

find that 95% of the companies going public on exchange-regulated markets in France (i.e. Marché

Hors-cote, Marché Libre, and Alternext) and 100% of the companies in Italy going public on MAC

and AIM Italia did not fulfill the requirements of their main markets. In particular, size and free

float are the impeding requirements. 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 constraints12

. This could

be related to the timing motivation leading to the listing. By contrast, only 44% of the German

companies 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 Abnormal

Returns (BHARs). These are calculated for stock i in time period T as follows:

1)1( delist) min(T,

1

,, −

+= ∏

=t

tiTi RBHR

∑ ∏∏= ==

+−

+=

N

i t

tM

t

tiT RRN

BHAR1

delist) min(T,

1

,

delist) min(T,

1

, )1()1(1

12

Age is measured in terms of 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.

10

Ri,t is the return on stock i at time t, T is the time period for which BHR is to be determined, N is the

number of stocks in a portfolio, and Rm,t is the raw return of the FTSE Euromid index, excluding

dividends13

. The BHARs are biased upwards by approximately 3% since the benchmark return on

the FTSE Euromid index return does not include dividends.

[INSERT TABLE 5 HERE]

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 realized market risk premium is negative,

and worse performance if the realized market risk premium is positive. In Table 5, we report,

indeed, that on average, main market IPOs show an apparent over-performance relative to the

benchmark, whereas the most negative figures are for new markets’ companies. The 580 main

market IPOs from 1995 to 2006 have an average 3-year buy-and-hold abnormal return of 12.3%,

whereas the 2,305 total IPOs have an average BHAR of -11.2%, implying average second-market

abnormal performance of -19.0%. The difference in riskiness is unlikely to account for this large

difference of 31.3% in BHARs.

Table 5 also reports the long-run returns on IPOs by 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 a 3-year BHAR of 25.3%, whereas AIM IPOs have a 3-year BHAR of -27.5%.

Gerakos et al (2011) report similar numbers for the long-run returns in London, and also report

liquidity differences similar to what we report.

(2) Liquidity difference

13

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 still stabilizing 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 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).

11

Trading platforms involve both direct and indirect network effects in both trading and listing14

. As a

consequence, traders prefer to trade on a platform where there are many other active traders.

Similarly, if one of the benefits for the firms of being listed is the liquidity provided to their shares,

the more liquid is a market, the more attractive it is. We compare the liquidity of the companies

going public on the main vs second markets. We adopt two measures of liquidity. Bid-Ask Spread

is calculated as the average ratio of the ask minus bid spread divided by the midpoint of the bid and

ask prices, expressed as a percentage. Turnover is calculated as the average of the ratio of the

aggregate shares traded per day divided by the number of shares outstanding, and is also expressed

as a percentage. We expect larger spreads and lower turnovers for IPOs on the second markets.

Table 5 shows that lower spreads are found for main market companies, an average of 2.2% vs. the

average of 7.6% for second market IPOs15

. Liquidity levels, however, are different on the different

types of second markets, with new markets characterized by heavy trading volumes. The interest

raised by these high-tech companies during the internet bubble was indeed so high that they show

the highest average turnover. The exchange-regulated markets represent the other extreme, where

very high bid-ask spreads and low turnovers testify that the lack of liquidity is a problem for most

of the listed companies.

(3) Delisting rates

Second markets were once considered as ‘seasoning’ markets, allowing businesses to learn to

experience life as a public company without the full discipline of the main markets’ rules. To some

extent, this was the ‘curse’ of second-tier markets, whose successful companies were meant to leave

the second markets to list on the main ones, whereas unsuccessful companies were expected to

eventually delist. We investigate what occurred in practice, and find that delistings were not

particularly more common on second markets compared to main markets. Even more interestingly,

market transfers were very uncommon, with the exception of the switch from and to London’s

AIM. The peculiarities of delistings refer to country-specificities rather than specificities related to

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 instead lower on the other exchanges, particularly in Germany (25.2%) and Italy

(27.1%).

14

Direct network effects exist when consumers value a product more, the more other consumers use the same product,

whereas indirect network effects exist when an increase in consumption by one set of users increases the value of a

complementary product to another distinct set of users. 15 If we calculate the turnover divided by the number of newly issued shares (instead of total share outstanding), the

average turnover of the main markets increases more than that of the second markets.

12

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 prove to provide more stable listings. This

survival pattern is also due, however, to the absence of seasoning and new markets in the UK,

where delistings are more common. The 60-month delisting rates are approximately 42% for

exchange-regulated markets and 20-28% for other markets. In the next subsection, a Cox regression

model is used to compare the survival profile of main vs second market IPOs, controlling for

country effects.

[INSERT FIGURE 2 HERE]

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

(companies are bigger and older, see Table 3). More importantly, the difference in the rate of

delisting must also consider regulatory differences. Delistings are indeed more difficult and ‘costly’

in continental Europe, where they compulsorily involve a tender offer16

.

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

Firms going public have a different probability of transferring control or delisting depending on the

market types. In particular, IPOs can be part of a larger process of transferring control rights, where

owner-managers of private firms use the IPO as part of a divestiture strategy (Brennan and Franks,

1997; Zingales, 1995). In order to identify potential acquirers and to increase a firm’s visibility,

shareholders of private firms could decide to use sequential divestitures through IPOs rather than

outright sales. The process of going public would therefore be responsive to adverse selection

problems by increasing the amount of information available on the firm (Reuer and Shen, 2003).

The IPO increases the level of a firm’s disclosure, and the consequent decrease in information

asymmetries may, in turn, increase the opportunities for equity deals. Thus, existing shareholders of

private firms can maximize their firm’s value by adopting the strategy of divesting after taking the

company public, rather than directly selling a still-private firm at a value limited by an illiquidity

16

The idea is that, by imposing an offer to purchase, minority shareholders of firms going private are to some extent

more protected from “leaving money on the table”, since they can at least recoup the residual value of the company.

This continental European tender offer requirement, though protecting minority shareholders, sometimes results in

companies remaining listed for long times, despite very few trades.

13

(lack-of-marketability) discount. This divesture strategy could be of interest in particular 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 market17

. In contrast to London,

market transfers are definitely uncommon in continental Europe, as shown in the last column of

Table 5. In our sample, only 8 companies switched markets by March 2010, out of 1,670 IPOs 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. Specifically, 282

companies left the LSE Official List to transfer to the AIM during 1995-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 in our sample. Of the latter, 8 IPO companies that transferred

to the Official List later came back to the AIM. Such bi-directional flow between the Official List

and the AIM points to complementarities in the appeal of the two markets. Section 5 of this paper is

dedicated to this issue and does not investigate the decision to go public, but that of transferring

between markets.

In Table 5, we report simple sorts. We now investigate whether being listed on a main vs second

market affects the probability of (1) being delisted, (2) being targeted in M&A deals, and (3)

transferring control. To this end, we implement Cox proportional hazard models, where the

dependent (failure) variable is equal to one if a company (1) was delisted after the IPO, (2) was a

target in at least one M&A attempt after the IPO, or (3) transferred control after the IPO, where a

transfer of control is identified when the equity sold to acquirers in an M&A deal reaches 50

percent. The time variable is equal to the time that elapses from the IPO to the event (delisting,

target M&A, control transfer). The independent variables include dummies for the market type

(main vs second market, as well as a single dummy for each market model) and the stock exchange.

We control for the effect of a number of firm characteristics, as the regressions control for (and test)

the influence of factors such as size (log of net sales in the year prior to the IPO, adjusted for

inflation), age (log one plus age at the IPO), leverage (debt over assets), profitability, Tobin’s Q,

VC-backing, and industry and year dummies.

We restrict the sample to firms that actually have a listing choice between the main and second

markets. Hence, we consider the 603 companies that went public on exchange-regulated markets

but could choose the main markets, as identified in Table 4 of Subsection 4.2. As for companies

17

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

14

listed on the main markets, we assume that big companies would not consider second markets as a

listing option. We thus put a maximum limit on the market capitalization at the IPO of 200m €,

adjusted for inflation; 512 of the 845 main market IPOs have smaller market cap. The restricted

sample is therefore composed of 1,115 companies, where the choice of market was not pre-

ordained18

. 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.

[INSERT TABLE 6 HERE]

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, to be targeted in M&A deals, and to

transfer control (though the statistical significance is limited in the latter case). The negative

coefficient on profitability may be interpreted as evidence in support of the matching theory of

ownership change, with less efficient firms being more often the target of other companies

(Lichtenberg and Siegel, 1990). The negative coefficients on Tobin’s Q may point to a lower appeal

of firms with higher valuations. Finally, we find weak evidence of a positive correlation of VC-

backing with the probability of being acquired. The presence of VC in a company may be perceived

as a quality (certification) signal by a potential acquirer, improving the probability of the company

being a target for other firms.

In Tables 5 and 6, we have documented that firms going public on a second market have a higher

probability of delisting, but this does not demonstrate causality. In general, we are unable to address

the endogeneity of the listing choices of the sample companies.

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 at the IPO and thereafter

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

18

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 in the main market of the Deutsche

Börse, and 52 on the main markets of Euronext.

15

capital for the firm. As a preliminary investigation, we hypothesize 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

needs to provide an exit for existing shareholders are more in line with offers of secondary shares.

Firms that are growing the fastest are likely to have the greatest demand for external capital.

Consistent with this logic, in Table 3 we showed that companies going public on the second market

typically offer a larger proportion of new shares over existing shares. This pattern may point to a

different perception of the role of the stock market that is coherent with the nature of the listing

firms. Younger and smaller firms need more external funds to finance their investments. Also, to

the degree that investors want a minimum market value of the free float, a small company will need

to sell a larger fraction to achieve this threshold. Furthermore, since there are fixed costs of going

public, a 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 higher propensity of second markets’ companies to raise fresh funds at the IPO

is continued in the aftermarket19

. Relatedly, we examine whether companies listed on main versus

second markets have different propensities to invest externally, i.e. to make acquisitions. We

therefore investigate whether capital raised at the IPO and in the post-IPO period are used to pursue

growth strategies through acquisitions. As shown in the bottom row of Table 7, 52.6% of these

1,115 issuers conducted at least one SEO, and 58.5% of the issuers made an acquisition attempt.

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. Second, to investigate the determinants of acquisition propensities, the

dependent variable is the number of acquisitions pursued by a firm after its floatation. We use

Poisson regressions because the dependent variables are counts that have a minimum of zero. We

use the “restricted” sample of 1,115 firms that had a listing choice between the main and second

markets, and rely on the same control variables as in previous models (Section 4.3).

[INSERT TABLE 7 HERE]

19

The IPO market and the M&A market are indeed not as independent as often assumed. The fresh capital raised

through an IPO could make available the funds needed to fuel the firm’s external growth. Besides cash acquisitions, the

IPO may also facilitate stock deals, as the establishment of a market price and the creation of public shares allows stock

to be used as currency to buy other firms. Indeed, the prospects of future deals grow as the amount of uncertainty about

valuation for would-be-investors is reduced, since the IPO places a price 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., 2011;

and Hsieh et al., 2011).

16

To give an economic interpretation to a coefficient in a Poisson regression, the coefficient is

multiplied by the mean of the dependent variable, reported at the bottom of Table 7. We find that,

compared to IPOs on the second markets, companies going public on the main markets have no

significant difference in terms of the number of follow-on equity issues, but a higher propensity to

pursue acquisitions. UK IPO-firms are more active in the SEO market, while German firms tend to

take part more frequently in acquisitions. Firm size is positively related to the number of deals

undertaken as an acquirer. Large firms may be better able to realize efficiencies from the

internalization of assets or technologies from a target firm because they can apply these assets on a

sufficiently large scale (Maksimovic and Phillips, 2001). Interestingly, more profitable firms are

characterized by a lower frequency of raising equity after the IPO, probably because they have more

internal funds available. 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 slightly significantly) to the number of SEOs. The lower propensity to acquire by

VC-backed companies may have been due to the financial aims of venture capitalists, which

typically consider the IPO as an exit strategy (Black and Gilson, 1998) rather than a means to

finance growth.

5. The choice to delist from main markets to transfer to second markets

For a firm to choose to delist from one market and transfer to another one, the attractiveness of a

listing must have changed. The attractiveness of a listing to a firm can change because the bundle of

attributes of the listing location has changed or because the firm itself changed so that a different

bundle of attributes has become more attractive. We examine the motivations for companies

switching between markets with different regulatory regimes.

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

17

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 the

companies that were forced to de-list from Nasdaq and then traded on the Pink Sheets. They find

that “trading down” to the Pink Sheets cost shareholders dearly. Macey et al. (2008) analyze

mandatory delistings, moving 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 deregister their shares in the period 1998-2004 and thus cease to be subject to SEC

reporting requirements. They find evidence 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, market transfers take place between the two markets of

the London Stock Exchange quite frequently, but are uncommon in continental Europe20

. We

therefore investigate the transfer decision 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 been very heavily towards AIM. In

particular, this trend reaches its top from 2001 to 2006, when 77% of the transfers occur, while it

shows a dramatic decrease in the last three years of our sample period21

. In the same period of great

attractiveness of the AIM (2001-2006), the Official List listed only 19 firms transferring from the

AIM, compared to 18 transfers in 2000.

20

Market transfers on the three continental stock exchanges are indeed extremely rare (less than 30 in fifteen years) and

market transfers from one country to another did not happen with reference to the four major stock exchanges under

investigation. 21

A possible motivation for this reduction in transfer 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. This was true also for

transfer from the Official List, where such decisions were not a matter upon which the listing rules required shareholder

approval. In 2007, the rules were changed so that firms switching from the main to the secondary market need to obtain

the approval of a majority of the shareholders before doing so.

18

[INSERT FIGURE 3 HERE]

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

Companies transferring between markets issue an official document in which they sometimes

explain the motivations leading to the switching decision, especially when transferring to the

Official List. Table 8 summarizes these reasons. Firms transferring to the AIM often cite the lower

costs (31.7%), the flexibility (20.3%), and minor regulation (16.3%)22

. These reasons are all related

to the more flexible environment of the AIM and corroborated by Jenkinson and Ramadorai (2010),

who analyse the news released by switching firms and find 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”23

. Besides differences on the listing requirements, there are

important differences regarding the ongoing obligations. For instance, in terms of disclosure

requirements, firms listed on the Official List have to comply with stringent requirements set out in

‘Listing, Disclosure, and Transparency Rules’, whereas no directives are given to AIM companies.

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, an announcement to the market of the transaction suffices for AIM companies

willing to pursue related party transactions, whereas even this would require shareholder approval

on the Official List.

22

Another motivation cited for transferring to the AIM relies on fiscal benefits (12.2% of our sample). Several tax

advantages are indeed in place in the UK related to investments in qualifying unquoted companies. In particular,

companies traded on AIM are regarded by the Inland Revenue as unquoted for this purpose. Tax reliefs available

include advantages for both individual investors (business asset taper relief and gift relief on the Capital Gains Tax

CGT, the Enterprise Investment Scheme EIS, the Inheritance tax IHT, the Relief for losses, and the Venture Capital

Trusts VCTs) and for corporate investors (Corporate Venturing Scheme CVS). An outline of the various tax reliefs

available to investors in AIM companies is reported on the website of the London Stock Exchange. 23

Leitterstorf et al. (2008) and Jenkinson and Ramadorai (2010) study the effects on stock prices of the announcements

of market transfer between the AIM and the Official List. Leitterstorf et al. (2008) find that firms that only announce a

transfer between markets do not experience any statistically or economically significant abnormal returns. On the

contrary, abnormal returns are found only for firms that announce equity issuance alongside their decision to transfer to

another market – positive returns for those switching from the AIM to the Official List and negative for those switching

the other way. They do not find any significant liquidity effect associated with 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 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, the price changes around the move to the lighter regulatory regime may reflect a signal about the prospects of

the firm rather than the effect of lighter disclosure regulation.

19

[INSERT TABLE 8 HERE]

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 listed companies on

the Official List. However, only firms on the Official List are required to be approved for listing by

the UK Listing Authority. These companies are subject to the Combined Code on Corporate

Governance, which is a code revised in 2003 as the UK’s response to the corporate scandals that

induced SOX and could be considered to be a regulatory cost-increasing change24

. On the other

hand, listing requirements on the AIM are minimal. Hence, we would expect that transfer onto the

Official List would be related to an increase in the level of mechanisms of corporate governance.

Vice versa, we would expect a decrease to be associated with the delisting from the main market for

transferring to the AIM, though these firms typically specify that they do not envisage alterations in

the standards of governance following the transfer.

To investigate the evolution in the mechanisms of corporate governance, we compare transferring

firms with a set of comparable companies that differ for the decision of staying on the same market.

The matching sample is based on companies listed on the AIM, as this is the reference market for

companies desiring more flexibility. For this matching, we start from the population of firms listed

on the AIM in the period 1995 - 2010 that do not belong to our sample of transferring firms, as

described in the data appendix. We use the nearest-neighbor propensity scores based on

independent characteristics considered important to the analysis (Dehejia and Wahba, 2002). We

estimate a logistic regression, where the predictive variables are firm size, age, and industry

dummies. In this way, we have a matched sample of 90 listed firms that do not transfer markets to

be compared to the sample of transferring firms25

. We refer to the sub-samples respectively as the

“matching sample” for companies that do not experience transfer, and the “transfer sample” for

companies that switch. After defining the structure of the new model, taking the same time

24 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’’). 25

To match treatment units with control units, we first estimate the propensity scores based on observable

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 themselves. These balancing tests are based on differences in

means t-tests between 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.

20

reference of the moving sample, we have collected the annual reports of the companies in the

matching sample. We have then investigated for each company of the two sub-samples five

variables affecting corporate governance policies: board size, the number and proportion of non-

executive directors, whether there is a split between the figures of CEO and Chairman, percentage

of non-executive chairman, and whether there is a non-executive chairman (Table 9).

[INSERT TABLE 9 HERE]

We find that firms transferring from the AIM to the Official List change their corporate governance

mechanisms in preparation for switching. Three years before the transfer, transferring firms are

similar to those of the matching sample. They both have, on average, boards of five to six members,

of which around 40% are non-executives. Having two separate individuals occupy the position of

chairman and CEO is pretty common (around 78%), with having a non executive chairman being

fairly common in both samples (61% matching vs 52% transfer). As time passes, however, the

difference between transferring and matching companies becomes more pronounced, and

companies take a different trajectory after the transfer. The number of board members and the

percentage of non-executives rises in firms that move to the Official List, while they remain almost

stable for non-transferring companies. In particular, it seems that companies add a director in

anticipation of the transfer. As soon as they join the main market, they also raise the

representativeness of non-executive directors and more often the chairman becomes a non-

executive. The different evolution in terms of the split between chairman and CEO is less evident.

On the other hand, companies moving from the main market to the AIM tend to decrease the level

of their corporate governance. Three years before the transfer, they have on average 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 indistinguishable from

those of other AIM-listed firms26

.

6. Valuation and listing choices

26

After the transfer, transferring and already listed firms are similar in terms of governance. The only difference,

although statistically weak (10%), is actually in favor of the matching firms. The split between chairman and CEO

seems indeed to become less frequent in companies that joined the AIM from the main market than in other AIM-listed

firms.

21

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 integrated27

. 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 opportunities

expected from the listing on a major market, such as financing growth opportunities on better terms

(Doidge et al., 2009). The superior regulation hypothesis predicts therefore that firms with higher

Tobin’s Q are more likely to list on main markets, both because firms with greater growth

opportunities want to, and because the commitment to greater regulation results in a higher Q. As a

result, we would expect that firms listed on the main market are worth more.

Offsetting this tendency, the lower requirements for listing on second markets allow companies to

more easily schedule their IPO in order to take advantage of “windows of opportunity”. These are

periods of market buoyancy during which other companies in the same industry tend to be

overvalued (or, alternatively, have their cash flows capitalized at a higher multiple). The immediate

reference is to the internet bubble, affecting upwardly the valuation of technology firms. New

markets provided an easy path to list firms, often with extremely high Q ratios, due also to their

limited pre-issue book value (Table 3).

Thus, valuation differences between markets may reflect the causal effect of different regulatory

requirements, or listing may reflect firms choosing to go public on a market where investors are

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 may be willing to pay a

higher price with less than perfectly integrated markets. Main market vs second market listings may

be affected by valuation differences, too. We explore whether the differences in valuation and

performance between Main Markets (MMs) vs Second Markets (SMs) IPOs affect the distribution

between MMs and SMs- of IPOs in the following periods.

Figure 4 reports the number of IPOs per year and their median Tobin’s Q (Tobin’s Q IPOs). This

median IPO valuation measure is compared to the median Tobin’s Q of listed firms for that year

(Tobin’s Q listed firms). The sample of listed firms is made of 7,067 firms present in Datastream

27

Lerner (1994) hypothesizes that private-market vs public-market valuation ratios vary through time, and the relative

valuations affect a biotech firm’s decision to go public vs using additional venture capital financing. The cross-listing

literature also recognizes that valuation differences affect a firm’s choice of whether to cross-list or not (i.e. Doidge et

al., 2009). Furthermore, the style investing literature (see Barberis and Shleifer, 2003) documents that firms that are

categorized as similar have a higher covariance once a categorization is made.

22

for the four stock exchanges (France, Germany, Italy, and the UK)28

. Inspection of Figure 4 shows a

positive correlation between the level of the market, as represented by Tobin’s Q, and IPO volumes.

In particular, differences in valuations between companies listed on main vs second markets are

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 there is an increase in the difference in median valuations between companies listed on main

and second markets.

[INSERT FIGURE 4 HERE]

7. Conclusions

In countries with sophisticated financial systems, there is usually more than one market for the

trading of securities, characterized by different regulatory requirements. Second markets have less

stringent listing requirements than main markets, and the vast majority of European IPOs during

1995-2009 have listed on these markets. Two of these second markets listed most of the firms going

public in their respective countries. The majority of the firms going public in Germany in this

period chose the Neuer Markt, even though it was dedicated to tech stocks and only existed for

seven years. In spite of 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 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 main

market IPOs: 3-year buy-and-hold abnormal returns of +12.3% for main market IPOs, versus -

19.0% for second-market IPOs. Furthermore, this underperformance is present even when internet

bubble-period IPOs are excluded from the sample of IPOs during 1995-2006. Among the different

types of second markets, the long-run performance is the worst on the exchange-regulated markets,

such as 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.

28 In the selection, we included both listed (Datastream: Active) and unlisted firms (Datastream: Dead series). The

average value for each year refers only to firms that are listed at the end of the corresponding year.

23

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, as more than half of their newly listed

companies are able to issue seasoned offerings.

Generally, the expectation is that successful companies listed on a second market will ‘graduate’,

and eventually move to the main market. This has almost never happened on the stock exchanges of

continental Europe. In London, this has occurred, but even more small cap firms on the Official List

have moved down to AIM, particularly in the period from 2001 to 2006. In general, second markets

have been particularly attractive to companies in hot periods, though 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 difference in median

valuations between companies listed on main and second markets.

24

Data appendix

A.1. The population of Initial Public Offerings.

Our main source of information is the EURIPO database (www.euripo.eu), managed by Universoft,

a spin-off of the University of Bergamo (Italy). It contains data and provides 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 list of Initial Public Offerings includes all and only those ‘real’ IPOs, i.e. 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 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. 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 time of the inception of AIM. Transfers from the

AIM to the Official List are traced with reference to the AIM Factsheets at the section “Cancellation

of admission”. AIM Factsheets are published monthly on the LSE website since 1995. The

motivation of transfer is deduced from the official transfer documents.

A.3 Firm information

We collect our information from issuing prospectuses, transfer documents, and annual reports. Data

are codified for all available years prior to the IPO (from prospectus information, which contains

mandatory information for at least three years before listing), as well as for all available years after

the IPO (from subsequent annual reports). Information such as the year and country of

incorporation of the firm, size of the offer and free float, or financial and business data comes from

25

the IPO prospectuses. Offer data have been cross-checked with Dealogic. For accounting data of

companies whose end of fiscal years is in a month different from December, we considered it

ending the following December. As for continental European firms, since 1999 most information is

reported in euros. For earlier years, we use monthly averages of the exchange rate between the ECU

and national currencies to obtain a euro-equivalent. For non-euro based companies, the exchange

rate for financial statement information is the average of the year, while for information related to

the offer (e.g. IPO proceeds), the exchange rate is as of the day of the IPO. The source of data on

exchange rates is Datastream. However, apart from descriptive statistics, financial data are

employed in panel regressions, where they are left in local currencies. The section dedicated to

market transfer refers 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 and is based on the

official classification adopted by the European stock exchanges, namely the ICB (Industry

Classification Benchmark).

A.4 Venture Capital

In order to identify venture capital financing we could not rely on a simple procedure and employed

a broad definition of VC financing. 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 not confined to the IPO year, but extends back in time, up to at least the three previous years.

Venture capital firms were identified 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 also referred to

other directories, including Pratt’s Guide to Venture Capital Sources, and Venture Capital Resource

Directory. We also included Venture Capital Trusts (VCTs) that are managed by established VC

firms.

A.5 Share information

26

Offer prices are from offering prospectuses, when disclosed as fixed price offers, or from the

website of the stock exchanges. 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 comes from directories of the stock

exchanges, cross-checked with Datastream, and is measured up to December 2010. The motivation

for delisting was deduced from official statistics provided by the stock exchanges, 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 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 ‘”M&A”, for mergers and acquisitions.

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 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 acquisitions attempts by the firm measured through March 2010. In line with other

authors (e.g. Bertrand and Zuniga, 2006), we keep all restructuring deals, composed of both

completed (78.6% of the deals of our sample firms) and pending (21.4%) deals. Thus, our sample

firms could be targeted in several M&A transactions, since with M&As we 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 that required major shareholders to disclose their holdings in a company. The percentage

level at which such an obligation is triggered 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) adopted 5% as a base level, as in the US, while Italy (Law No. 58 of 1998) and the UK

(Companies Act 1985 sections 198-212) were at 2% and 3%, respectively. To identify those

companies whose control was transferred in M&As, we summed the number of shares transacted in

27

M&A deals (where the firm was the target). The control transfer is assumed to take place when the

equity sold to acquirers reaches 50 percent.

A.7. Corporate governance

The source of information on the 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 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; (4) ‘Non executive chairman’ is the proportion of companies that

appointed a non-executive director as a chairman.

28

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31

Table 1. Evolution of the structure of European Stock Markets and models of segmentation

Panel A. Evolution in the structure of the European Stock Markets

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Paris Bourse / Euronext

main Premier Marché

Eurolist seasoning Second Marché

new

Nouveau Marché

Exch-reg Hors-c. Marché Libre Marché Libre / Alternext

Deutsche Börse

main Amtlicher Markt

seasoning Geregelter Markt

new

Neuer Markt

Exch-reg

Freiverkehr Markt

Borsa Italiana

main MTA

seasoning Mercato Ristretto Expandi

new

Nuovo Mercato Mtax

Exch-reg

MAC / AIM Italia

London Stock

Exchange

main Official List

new USM

new

(techMark)

Exch-reg AIM

Panel B. Models of market segmentation Model of segmentation and

market models Supply

(target firms) Demand

(target investors) Successful

period Markets

Sequential segmentation: seasoning markets

Size: SMEs

No restrictions Nineties Second Marché of Paris Bourse, Geregelter Markt of Deutsche Börse, Mercato Ristretto and Expandi of Borsa Italiana, USM of London Stock

Exchange

Sectorial segmentation: new markets

Industry: high-tech

No restrictions Internet Bubble

Nouveau Marché of Paris Bourse, Neuer Markt of Deutsche Börse, Nuovo Mercato / MTax of Borsa Italiana

Demand-side segmentation: Exchange-regulated markets

Age: young

Qualified institutional

buyers Zero years

Marché Hors-cote and Marché Libre of Paris Bourse, Alternext (and Marché Libre) of Euronext, Freiverkehr Markt of Deutsche Börse, MAC and

AIM Italia of Borsa Italiana, AIM of London Stock Exchange

32

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.

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).

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 company was launched

on June 17, 1999 as Nuovo Mercato, and then labeled MTax in September 19, 2005. Both 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.

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.

33

Table 2. The population of European IPOs over the last 15 years.

1995-1997

1998-2000

2001-2003

2004-2006

2007-2009

Total 1995-2009

Foreign companies

No. IPOs from other countries of the

sample

No. Private placings

No. % No. % No. %

Paris B./ Euronext

main 2 7 7 66 31 113 13.5 8 7.1 - - -

seasoning 69 101 11 5 0 186 22.2 3 1.6 1 - -

new 31 116 7 0 0 154 18.4 3 1.9 1 - -

Exch-reg 21 107 69 97 91 385 45.9 15 3.9 1 7 1.8

Total 123 331 94 168 122 838 22.3 29 3.5 3 7 0.8

Deutsche Börse

main 17 55 6 46 18 142 23.5 11 7.7 3 - -

seasoning 11 46 9 5 8 79 13.1 8 10.1 2 - -

new 11 282 11 0 0 304 50.4 36 11.8 8 - -

Exch-reg 0 0 0 44 34 78 12.9 10 12.8 1 13 16.7

Total 39 383 26 95 60 603 16.1 65 10.8 14 13 2.2

Borsa Italiana

main 33 48 22 27 17 147 64.2 1 0.7 - - -

seasoning 1 1 1 14 15 32 14.0 0 0.0 - 9 28.1

new 0 36 4 1 0 41 17.9 0 0.0 - - -

Exch-reg 0 0 0 0 9 9 3.9 1 11.1 - 9 100

Total 34 85 27 42 41 229 6.1 2 0.9 - 18 7.9

London S.E.

main 165 147 35 68 28 443 21.2 38 8.6 3 317 71.6

Exch-reg. 175 274 218 786 189 1,642 78.8 325 19.8 16 1,572 95.7

Total 340 421 253 854 217 2,085 55.5 363 17.4 19 1,889 90.6

Total 4 Exchanges

main 217 257 70 207 94 845 22.5 58 6.9 6 317 37.5

seasoning 81 148 21 24 23 297 7.9 11 3.7 3 9 3.0

new 42 434 22 1 0 499 13.3 39 7.8 9 - -

Exch-reg 196 381 287 927 323 2,114 56.3 351 16.6 18 1,601 75.7

second 319 963 330 952 346 2,910 77.5 401 13.8 30 1,610 42.9

Total 536 1,220 400 1,159 440 3,755 459 12.2 36 1,927 51.3

% 14.3 32.5 10.7 30.9 11.7 12.2

34

The table reports the number of Initial Public Offerings (IPOs) by stock exchange and by subperiod. Markets are classified according to the models summarized

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, 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. Private placements, however, are included if they are listed on an exchange (e.g., UK placings).

The number of private 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.

35

Table 3. European firms at IPO, by listing market

Panel A: Firm characteristics and offer proceeds

Stock Exchange

Market model

VC-backed Age (years) Sales (m€) Assets (m€) Proceeds (m€)

% mean median mean median mean median mean median

Paris B. / Euronext

main 36.0 18.3 9 1,590.9 166.1 4,021.5 220.9 630.7 166.5

seasoning 36.8 17.1 12 80.6 35.4 63.8 26.8 13.2 7.2

new 38.7 7.8 6 16.0 10.4 15.1 8.5 18.8 11.1

Exch-reg 23.5 13.0 8 176.6 7.3 219.8 5.5 31.1 1.5

Total 31.0 13.4 9 316.5 13.7 660.2 11.2 105.7 6.3

Deutsche Börse

main 39.7 34.3 13 1,052.7 124.8 2,087.1 78.0 281.2 85.3

seasoning 29.2 17.1 9 31.5 15.0 24.9 17.5 38.0 21.2

new 48.7 11.0 8 61.2 14.5 50.7 12.5 64.3 37.6

Exch-reg 31.5 15.8 7 21.9 7.8 17.4 8.6 14.8 10.0

Total 42.6 17.2 9 285.7 18.5 522.6 16.3 105.5 37.2

Borsa Italiana

main 22.1 44.4 31 704.3 147.6 1,185.7 162.5 307.5 80.4

seasoning 22.7 22.4 16 56.8 33.0 96.8 35.6 29.0 18.0

new 35.9 9.8 8 62.0 22.5 39.7 22.4 109.7 43.2

Exch-reg 25.0 10.3 12 21.3 16.7 38.5 28.9 8.8 8.5

Total 24.9 37.6 24 472.0 88.0 783.3 93.5 221.4 52.2

London S.E.

main 65.7 8.8 4 509.5 41.1 451.6 30.1 193.1 64.8

Exch-reg. 61.9 6.6 2 26.9 5.3 24.5 5.4 14.6 6.9

Total 62.9 6.9 2 129.4 8.2 115.3 7.6 52.5 8.5

Total 4 Exchanges

main 49.0 28.6 13 779.3 80.6 1,331.5 68.1 286.3 76.5

seasoning 33.8 17.7 12 65.0 31.1 57.0 25.7 21.5 9.4

new 44.6 9.9 8 47.3 12.6 38.8 11.5 54.0 28.6

Exch-reg 51.5 8.2 4 53.2 6.5 59.0 5.7 17.4 5.5

second 48.5 9.5 6 53.4 9.9 55.3 8.5 24.1 9.8

36

Total 48.2 13.6 6 217.2 16.5 343.0 14.2 83.2 14.6

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 Exchange

Market model

Primary shares (%) Free float (%) Underpricing (%) Tobin's Q Industry Q

mean median mean median mean median mean median mean median

Paris B. / Euronext

main 23.0 16.5 29.2 25.0 5.3 3.4 1.84 1.54 2.79 2.59

seasoning 8.9 0.0 19.7 18.0 2.9 1.1 2.04 1.71 2.48 1.70

new 29.9 26.8 27.2 26.6 55.0 2.3 4.11 3.24 3.83 3.48

Exch-reg 7.6 0.0 14.1 10.0 7.3 3.9 3.29 2.13 3.00 2.50

Total 14.0 6.3 19.8 18.2 15.9 2.5 2.96 2.04 3.00 2.35

Deutsche Börse

main 32.4 29.4 27.0 28.3 9.6 2.5 2.56 2.03 2.73 2.32

seasoning 31.5 31.0 16.4 16.7 29.1 5.1 3.60 2.02 3.12 2.31

new 31.4 29.9 26.7 26.6 48.1 21.1 5.97 3.41 4.25 4.14

Exch-reg 34.6 31.5 23.4 23.1 3.0 1.4 3.72 2.27 2.90 2.50

Total 32.0 30.0 25.0 26.0 32.7 6.7 4.61 2.84 3.57 2.84

Borsa Italiana

main 23.3 22.1 31.2 31.9 9.7 3.1 1.77 1.52 2.28 1.70

seasoning 32.3 31.0 26.3 31.3 9.5 5.7 1.81 1.47 2.77 2.48

new 32.7 28.1 27.2 24.1 21.9 4.1 5.07 3.35 4.02 4.60

Exch-reg 35.4 17.1 25.0 16.7 20.8 10.0 1.90 1.91 2.35 2.41

Total 23.3 26.0 29.6 30.0 12.2 4.1 2.38 1.68 2.67 2.26

London S.E.

main 39.1 32.7 39.5 34.7 13.7 8.4 3.58 2.18 2.73 2.35

Exch-reg. 50.5 37.5 38.8 30.8 18.9 10.2 3.86 2.16 2.84 2.57

Total 48.1 36.3 39.0 31.4 17.8 10.0 3.80 2.16 2.82 2.54

Total 4 Exchanges

main 32.9 27.6 34.5 31.9 11.3 5.4 2.83 1.91 2.66 2.31

seasoning 15.1 11.3 19.5 18.8 10.2 1.2 2.40 1.72 2.67 1.99

new 31.0 28.5 26.9 26.4 47.9 11.1 5.32 3.32 4.10 4.04

37

Exch-reg 42.2 32.9 33.7 28.4 16.4 8.8 3.74 2.16 2.87 2.54

second 37.8 29.2 31.1 26.3 21.9 8.3 3.90 2.34 3.06 2.59

Total 36.7 28.9 31.8 23.8 19.5 7.5 3.64 2.22 2.97 2.54

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 ***

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 free 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). Our definition of free float (also labeled public float) is different from that used by the stock exchanges in Europe, which consider as free float all the

share-ownerships lower than the cut-off ownership levels for mandatory disclosures required by national laws. 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. Significance levels are at 1% (***), 5% (**), or 10% (*).

38

Table 4. Going public on the second markets: Measurable listing requirements

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 (we define free float as the ratio of the number of shares

offered at the IPO over the number of shares outstanding after the IPO), (2) minimum market capitalization 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). a Waivable by the admission committee.

Country

France Germany Italy UK 4 exchanges Euro.NM US Main vs exchange-regulated market

Eurolist vs Alternext

Amtlicher vs Freiverkeher

MTA vs AIM Italia /MAC

Official List vs AIM

Main vs second

New markets

NYSE Nasdaq

Panel A: Listing requirements

1) Free float (Minimum percentage of shares in public hands)

25% vs None 25% vs None 25% vs None

25% vs None

20%

1,100,000 shares

500,000 shares

(2) Size (minimum market capitalization)

50 vs 2.5 m€ 1.25 m€ vs None

40 m€ vs None

700,000 £ vs None

5 m€

60 $ m free float

1 $m

3) Age (years of prior financial statements required)

3 vs 2 3 vs 1 3 vs 1 3 vs None

3 a

3 a 3 a

Panel B: Number of IPOs on the Exchange-regulated markets, 1995-2009

No. of IPOs on the Exchange regulated markets, 1995-2009

385 78 9 1,642 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 reason

365 (94.8%) 34 (43.6%) 9 (100%) 1,103 (67.2%) 1,511 (71.5%)

39

Table 5. Mean stock market performance and liquidity measures for European firms after the IPO, by listing market

Performance 3-year

Performance 5-year

Liquidity measures (%)

Delistings

Reasons (%) Market transfer

from (No.) No. BHR BHAR No. BHR BHAR

Bid-Ask

Turn-over No. %

Volun-tary Imposed M&A Unknown

Paris B. / Euronext

main 31 46.6 25.4 15 37.9 -9.3 1.1 4.5 - seasoning 169 56.7 34.3*** 164 33.2 15.6 3.1 11.1 85 45.7 0.0 3.5 1.2 95.3 -

new 135 -5.3 -11.6 135 -33.3 -58.8*** 2.7 12.4 70 45.5 0.0 5.7 0.0 94.3 1 Exch-reg 204 -8.5 -25.2*** 169 -4.4 -46.7*** 12.6 3.5 124 32.2 3.2 19.4 0.8 76.6 3

Total 539 15.9 -0.2 483 1.6 -27.7*** 7.1 7.1 298 35.6 1.3 10.4 1.0 87.2 4

Deutsche Börse

main 74 -17.6 -30.1*** 67 -6.5 -29.6** 2.1 2.6 32 22.5 0.0 0.0 0.0 100.0 - seasoning 57 -66.9 -69.7*** 55 -69.2 -90.7 3.5 10.0 23 29.1 0.0 4.3 0.0 95.7 1

new 285 -18.7 -11.1 284 -72.2 -91.9 2.7 15.0 97 31.9 10.3 3.1 0.0 86.6 2 Exch-reg 1 -37.2 -28.3 - - - 2.8 3.4 0 0.0 - - - - -

Total 417 -25.2 -22.5 406 -61.0 -81.4 2.7 10.5 152 25.2 6.6 2.6 0.0 90.8 3

Borsa Italiana

main 161 31.4 3.8 150 53.6 10.5 0.9 6.0 48 32.7 16.7 12.5 45.8 2.1 1 seasoning 4 36.7 -13.7 3 -3.8 -50.3 1.8 4.8 3 9.4 0.0 0.0 0.0 100.0 -

new 35 -71.7 -50.1 35 -70.2 -91.9 0.7 31.3 11 26.8 27.3 9.1 45.5 18.2 - Exch-reg - - - - - - 2.0 0.5 0 0.0 - - - - -

Total 200 16.1 -5.9* 188 29.5 -9.6 1.0 9.6 62 27.1 11.4 9.8 56.1 22.8 1

London S.E.

main 314 48.5 25.3** 277 39.3 12.9 3.0 9.7 237 53.5 10.5 6.3 47.7 35.4 36 Exch-reg. 835 3.9 -27.5*** 466 0.5 -45.7*** 9.0 4.1 848 51.6 21.5 19.6 30.4 28.5 71

Total 1,149 13.3 -13.1** 743 15.0 -23.9* 7.7 5.3 1,085 52.0 19.1 16.7 34.2 30.0 107

Total 4 Exchanges

main 580 35.2 12.3* 509 37.4 5.9 2.2 7.0 336 39.8 9.1 6.5 44.8 39.5 37 seasoning 230 25.6 7.7 222 7.4 -11.6 3.1 10.3 111 37.4 0.0 3.6 0.9 95.5 1

new 455 -18.8 -14.2 454 -60.5 -82.0 2.5 15.5 178 35.7 7.3 4.5 2.8 85.4 3 Exch-reg 1,040 1.4 -27.0*** 635 -0.8 -46.0*** 9.5 3.9 972 46.0 19.1 19.5 26.6 34.7 74 second 1,725 -0.7 -19.0 1,311 -20.1 -52.6*** 7.6 6.5 1,261 43.3 15.8 16.0 21.0 47.2 78

Total 2,305 8.3 -11.2 1,820 -4.0 -36.3 6.3 6.9 1,597 42.5 14.2 13.8 26.7 45.4 115

Main vs. second test difference

2.69

*** 2.45

***

5.65 ***

5.62 ***

-15.28

*** 1.86

**

-0.420

40

Buy-and-Hold Abnormal Returns (BHARs) are calculated for stock i in time period T as follows:

1)1( delist) min(T,

1

,, −

+= ∏

=t

tiTi RBHR

∑ ∏∏= ==

+−

+=

N

i t

tM

t

tiT RRN

BHAR1

delist) min(T,

1

,

delist) min(T,

1

, )1()1(1

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 stabilizing 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 correcting

for new listing and rebalancing biases. A further adjustment (Jegadeesh and Karceski (2004)) is performed to correct for heteroskedasticity, serial correlation and

weights to 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 day 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. Significance levels at 1% (***), 5% (**) or

10% (*).

41

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

Model a Delistings Targeted in M&As Transfer control

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 0.11 0.15 0.02 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 dummies Yes Yes Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes Yes Yes

Log Pseudo Likelihood b

- 876*** - 836*** - 1,457*** - 1,342*** - 879*** - 892***

Firms involved in delistings or M&A deals

39.9% 445 firms 54.3% 605 firms 28.5% 318 firms

a z-Test for significance of the independent variables, based on robust standard errors.

b Wald χ2

-Test for significance of the regression.

*** 1% significance level; ** 5% significance level; * 10% significance level.

The regressions test whether being listed on a main vs second market affect the probability of (1) be delisted, (2) be targeted in M&A deals, both successful and

unsuccessful, and (3) transfer control. To this end, we implemented a Cox proportional hazard models, where the dependent (failure) variable was equal to one if

a company was (1) delisted after the IPO, (2) a target in at least one deal after the IPO, and (3) transferred control after the IPO. The time variable was equal to

the time that had elapsed from the IPO to the event (delisting, target M&A, control transfer). 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 capitalization 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, with seasoned equity offerings (SEOs) and acquisitions attempts by the firm measured through March 2010, and with delistings measured

until December 2010. 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.

42

Table 7. Poisson regressions on the financing and investment behavior of European IPOs.

Model a Number of SEOs Number of acquisitions

Coeff. values Coeff. values Coeff. values Coeff. values

Main market dummy 0.34 0.72 - - 0.65** 2.25 - -

Paris B. / Euronext - - -0.18 -0.38 - - 0.15 0.52

Deutsche Börse - - -0.08 -0.17 - - 0.19* 0.40

London S.E. - - 0.56** 1.19 - - - 0.11 -0.23

Control variables

Ln Sales 0.22 0.47 0.35* 0.74 0.12* 0.42 0.18** 0.62

Ln (1 + Age) 0.18 0.38 0.17 0.36 -0.19 -0.66 -0.15* -0.52

Leverage 0.19 0.40 0.23 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* 0.87 0.31 0.66 -0.29** -1.00 -0.31** -1.07

Industry dummies Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes

Pseudo R 2 %

b 9.44*** 9.86*** 11.64*** 12.15***

Mean values of dependent variable 2.12 3.46

Firms involved in SEO or M&A deals 52.6% 586

firms

58.5% 663 firms

a z-Test for significance of the independent variables, based on robust standard errors. b

Wald χ2-Test for significance of the regression.

*** 1% significance level; ** 5% significance level; * 10% significance level.

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 capitalization 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 labeled “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.

43

Table 8. Motivations of transfers within the markets of the London Stock Exchange, 1996-2009

From Official List to AIM From AIM to Official List

No. % No. %

Lower Costs 39 31.7 0 0.0

M&A 38 30.9 5 8.2

Growth 35 28.5 9 14.8

Interest of shareholders 30 24.4 39 63.9

More flexibility 25 20.3 0 0.0

Less regulation 20 16.3 0 0.0

Fiscal benefits 15 12.2 0 0.0

Visibility & growth 8 6.5 22 36.1

Rules Required 2 1.6 0 0.0

Information on motivations for transfer is 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.

44

Table 9. Evolution of Corporate Governance characteristics around market transfer on the LSE, 1995-2009

No. directors Non-executive Directors

Year Sample No.

obs Mean Median

Mean (No) Mean (%) Split (%)

Non exe. chair (%)

AIM to OL 31 5.77 6 2.48 41.8 77.4 51.7

-3 OL to AIM 184 6.12** 6** 2.77** 45.0 67.4 44.6

Matching 23 5.30 5 2.13 39.5 78.3 60.9

AIM to OL 51 5.98 6 2.74 42.5 71.1 56.5*

-2 OL to AIM 195 5.89 6 2.69 45.3 64.1 43.9

Matching 40 5.68 5 2.65 45.3 77.5 65.0

AIM to OL 55 6.60** 7** 3.12 44.0 75.5 57.4

-1 OL to AIM 202 5.64 6 2.64 46.2 62.4* 48.5

Matching 58 5.91 6 2.90 47.7 77.6 53.4

AIM to OL 60 6.48** 6** 3.25* 49.3 75.9 56.9

0 OL to AIM 214 5.52 5 2.60 46.3 65.4* 44.4

Matching 67 5.82 5 2.75 46.3 71.1 50.7

AIM to OL 52 6.67*** 6*** 3.54*** 52.4* 80.0 68.6**

1 OL to AIM 199 5.48 5 2.63 47.7 64.8* 45.5

Matching 71 5.73 6 2.61 44.5 76.1 50.7

AIM to OL 38 6.68*** 6*** 3.45*** 52.0** 91.9 73.0***

2 OL to AIM 172 5.31 5 2.57 47.8* 66.8* 46.8

Matching 59 5.39 5 2.32 41.6 76.3 57.6

AIM to OL 30 6.58*** 7*** 3.58*** 54.4*** 97.7 76.7**

3 OL to AIM 107 5.17 5 2.44 46.3 71.0 46.7

Matching 26 5.04 5 2.08 40.3 76.9 50.0

The 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

45

the difference between the transfer and the matching sample. Significance levels are based on t-statistics (mean), the Mann-Whitney U-test (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. Significance level at 1% (***), 5% (**) and 10% (*).

46

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

Figure 1. 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 Portugese exchanges, all Euronext IPOs are included.

0

100

200

300

400

500

600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Nu

mb

er

of

IPO

s

Number of European IPOs by year and by market type

Main Seasoning Sectorial Exchange-Regulated

47

Figure 2. Survival profile of European IPOs

Figure 2. Survival curves for IPOs by type of listing market and by listing stock exchange. Market transfers are not considered as delistings.

0.0

00.2

50.5

00.7

51.0

0

0 12 24 36 48 60 72 84 96 108 120

Time from IPO (months)

Main

Seasoning

Sectorial

Exchange-reg

Kaplan-Meier estimator

Survival profile by market model

0.0

00.2

50.5

00.7

51.0

0

0 12 24 36 48 60 72 84 96 108 120

Time from IPO (months)

Paris / Euronext

Deutsche Borse

London S.E.

Borsa Italiana

Kaplan-Meier estimator

Survival profile by stock exchange

48

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

Figure 3. Number of transfers between LSE Official List and AIM.

01

1213

18

7

42 2 2 2

1211

4

1

75

11

25

36

41

48

22

39

31

6

10

00

10

20

30

40

50

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Number of transfers between LSE Official List and AIM

90 transfer from AIM to Official List 282 transfer from Official List to AIM

49

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

50

Figure 4. 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 (source of data for listed firms: Datastream). For IPOs, the market value is

measured at offer prices and the book value is post-IPO.