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Empirical Capital Market Research in Germany

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Abstract

The article classifies and evaluates the empirical capital market research for Germany for the last 50 years and relates it to U.S. findings, where research already started in the 1960s. Interestingly, significant differences remain. Topics we discuss are asset-pricing models, information efficiency, and market anomalies, as well as initial public offerings, seasoned equity offerings, and preferred shares. We also reflect on the New Economy period and the Neuer Markt around the turn of the millennium, revealing conflicts of interest in the German universal banking system and shortcomings in capital market regulation. We also discuss the recent research for each topic.

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Notes

  1. 1.

    Research on German capital markets is still an underrepresented research area, although for different reasons. During the last two decades, the growing interest of German scholars to publish in leading international journals has resulted once again in a shift away from German data and towards U.S. and cross-country data, as using such data increases the probability of having a paper published in international journals. Nevertheless, the German institutional environment still offers sufficient uniqueness to attract international interest.

  2. 2.

    For detailed descriptions of the databases, see Bühler et al. (1993), Göppl and Schutz (1993).

  3. 3.

    It should be mentioned here, that Schmidt is a very common name in Germany and thus also among finance professors. Readers should be aware of the different first names of three Schmidts, often mentioned in this article, of Hartmut Schmidt, emeritus at the University of Hamburg, Reinhart Schmidt, formerly at the Universities of Kiel and Halle, and Reinhard H. Schmidt, one of the authors of this article. We use abbreviated first names to identify the different scholars with the last name Schmidt.

  4. 4.

    Founding members of the Deutsche Gesellschaft für Finanzwirtschaft were Wolfgang Bühler, Günter Franke, Günter Gebhardt, Wolfgang Gerke, Hermann Göppl, Thomas Hartmann-Wendels, Walter Krämer, Hans Peter Möller, Sigrid Müller, Hartmut Schmidt, Reinhart Schmidt, Siegfried Trautmann, Martin Weber, Josef F. Wertschulte and Jochen Wilhelm.

  5. 5.

    As the great depression in 1929 triggered changes in the U.S. financial system, the two world wars caused dramatic changes in the German financial system. It is important to note that Germany had thriving capital markets with 23 stock exchanges and nearly 1600 listed firms in 1913. Moreover, more than 1000 IPOs occurred at the Berlin Stock Exchange, which was the dominant exchange, between 1870 and 1938 (Burhop et al., 2018). It also had sophisticated derivatives trading, and Bronzin derived a sophisticated option-pricing model in 1908. For a comparison with the Black and Scholes (1973) and other models (Bachelier, Samuelson) see Zimmermann and Hafner in Bessler (2006).

  6. 6.

    For a favourable view of the German-type bank-dominated system, see most prominently Allen and Gale (2000), but there are quite some opposite views. Various contributions in Krahnen and R.H. Schmidt (2004) extensively discuss this topic.

  7. 7.

    There exist at least 600 articles related to empirical capital market research in Germany since 1970.

  8. 8.

    For surveys of empirical bond and derivatives market research, see the Chaps. 8–11 of Albrecht and Maurer (2016). Marc Rieger discusses some aspects of behavioural finance in his article in this volume. For surveys of German empirical research on banking, market microstructure and empirical accounting studies for the later years of the last century, see the contributions of Theissen, Hackethal and Leutz and Wüstemann in Krahnen and R.H. Schmidt (2004). See also the articles in Bessler (2006) on market microstructure (Stoll; Schwartz et al.; Gomber et al.; Grammig et al.; Kempf and Mayston; Schlag et al.; Weinhardt et al.), capital markets (Drobetz and Zimmermann; Kürsten), and derivatives (Röder and Hahnenstein; Zimmermann and Hafner). For a current perspective on the development of capital markets, see the articles in the special issue “German Capital Markets and Corporate Governance” of the Journal of Applied Corporate Finance (2015, No 4).

  9. 9.

    H. Schmidt (2013) provides a detailed history of DTB and Eurex as well as on the founding of Deutsche Börse AG in 1992. The opening event for the DTB included three academic presentations by Nobel laureates Merton Miller and Fischer Black as well as by Hartmut Schmidt, highlighting the importance of capital and derivatives markets, published in: Optionen and Futures – Auftrieb für den Finanzplatz Deutschland durch die DTB? (1990).

  10. 10.

    For the success of Eurex and the dominance of electronic over floor trading, see Bessler et al. (2006). For the development of electronic trading at Eurex see also Book (2001). Unfortunately, the success of Eurex and its technological leadership resulted in blocking at least two acquisitions of Deutsche Börse AG to become a leading international market infrastructure provider. Regulatory intervention prevented the acquisition of the New York Stock Exchange and London Stock Exchange due to the potential market power of Eurex.

  11. 11.

    In fact, some European exchanges stopped trading of their domestic government bond future contracts (France, Italy, Spain) after the introduction of the Euro as trading concentrated in German Bund Futures. However, during the sovereign debt crisis in 2008–2010, new futures on government bonds for Italy, France and Spain were introduced again (Bessler & Wolff, 2014). However, this time not at the national exchanges but at Eurex, which offers nowadays many derivatives contract on European securities.

  12. 12.

    Bessler (2007) argues that the banks’ dominance may have resulted in less efficient capital markets and less stringent capital market regulation (e.g., insider-trading rules). It may have further slowed the development and growth of corporate debt and equity markets and the introduction of financial innovations such as the trend towards securitization.

  13. 13.

    For a discussion of these issues, see R.H. Schmidt (2004). Various articles in the special issue of the JACF (2015) on Capital Markets and Corporate Governance in Germany provide new evidence, highlighting some changes that have occurred during the last two decades.

  14. 14.

    This well-known definition in Fama’s seminal article from 1970 also includes the quotation marks around the words “fully reflects”, indicating that Fama was aware of the fact that he could not clarify what “fully reflects” really means. In his discussion of Fama’s work, R.H. Schmidt (1976) considers various possible interpretations. As he argues, in spite of being suggestive, the words “fully reflects … information” do not mean more than that with the use of this information investors cannot earn an excess profit.

  15. 15.

    Moreover, as markets cannot be truly efficient in the weak form, if they are not also efficient in the semi-strong form, the empirical findings in this section cast some doubt on some studies and conclusions reported in the previous section.

  16. 16.

    All of them have been developed and used in numerous empirical studies in the United States and with U.S. data. Their findings and their interpretations, however, are not always fully convincing. These difficulties of the empirical work can be traced back to the conceptual problems of even properly formulating the hypothesis of strong-form market efficiency (see Schmidt 1976, p. 390f.).

  17. 17.

    Although the dominant view today is that fund managers cannot systematically outperform the benchmark, many decades ago such a conclusion was very provocative. Berk and Green (2004) provide the theoretical basis and Bessler et al. (2018) the empirical evidence that portfolio managers cannot achieve a persistent outperformance in well-functioning capital markets due to equilibrium processes. Although this is no direct test of the strong-form market efficiency, the conceptual idea how markets function is similar to Fama (1970).

  18. 18.

    For an early study for Germany, see Schulz (1972). Wulff (2002) analyses stock splits and reports positive announcement effects, which might be due to a neglected firm effect.

  19. 19.

    Stahl (1969) and Zimmermann (1987) performed earlier studies for SEOs.

  20. 20.

    In contrast, Gebhardt et al. (2001) find negative returns of 2.28% for financial institutions, which is consistent with the U.S. literature on SEOs for banks (Slovin et al. 1992).

  21. 21.

    During the last decade, a number of spin-offs occurred in Germany as companies focus more on their core competencies and trying to avoid a diversification discount. Siemens had six spin-offs with EPCOS (1999), Infineon (2000), Gamesa (2000), Osram (2013), Healthineer (2018), and Energy (2020). Bayer had two spin-offs with Lanxess (2005) and Covestro (2015). This may become again a more important research topic in the future.

  22. 22.

    SPACs or Special Purpose Acquisition Companies perform both, an IPO and an M&A. The shareholders have to agree on the M&A target, and if they do not, the money is returned. German corporate law does not permit such a structure. Therefore, firms usually incorporate under foreign law and then go public in Germany.

  23. 23.

    Deutsche Telekom went public at €14.57 (28.50 DM) on 11-18-1996, issued additional equity at €39.50 on 6-28-1999 and again at €63.50 on 6-19-2000, already in a declining stock market. The DT reached its highest price at €103.50 on 3-6-2020 and declined since then, reaching the lowest point at €7.71 on 6-5-2012, a decline of more than 90%.

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Bessler, W., Schmidt, R.H. (2022). Empirical Capital Market Research in Germany. In: Matiaske, W., Sadowski, D. (eds) Ideengeschichte der BWL II. Springer Gabler, Wiesbaden. https://doi.org/10.1007/978-3-658-35155-7_11

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