How Issue Size, Risk, and Complexity are Influencing External Financing Costs: German IPOs Analyzed from an Economies of Scale Perspective

Abstract

This paper is focused on the cost of raising capital in Germany. A cross-sectional analysis of flotation cost data for 117 IPOs over the years 1993-1998 is presented. We find average flotation costs to be 7.77 percent of gross proceeds, while underwriting fees average 5.01 percent. Our results extend the literature in two important directions. First, contrary to the conventional economies of scale view we find marginal spreads to be rather constant in gross proceeds and to be higher for more risky and more complex offerings. Fixed costs amount to 5 to 9 percent of underwriting fees. Second, by applying a principal component analysis we find issue size, an issuer risk factor, and an offering method complexity factor to have an economicaly meaningful impact on underwriting fees. Copyright Blackwell Publishers Ltd, 2002.

Initial Public Offerings and Venture Capital in Germany

“…Examples of the first type are the underwriting and the listing fees. The average direct costs are between 5% and 10% of the IPO volume, depending on the size of the IPO, the risks involved, and the complexity of the chosen IPO mechanism (Schürmann andKörfgen, 1997, p. 180, andKraft, 2003). The direct costs for listing at the different segments vary, but the differences hardly influence the choice of segment, and they are not much higher in Germany than in other countries so that they should not impede IPO activity (Fischer, 2000).…”

The impact of the Sarbanes-Oxley Act on the Cost of Going Public

“…Chen and Ritter (2000) documented a pronounced clustering of underwriting fees at 7 percent, leading them to coin this phenomenon as the "7-percent rule". In other markets, however, clustering seems to be less present, as has been documented by Torstila (2003) or Kaserer and Kraft (2003). Hansen (2001) examined the question of whether this 7-percent rule is the result of collusion among underwriters.…”

“…On the other side, however, legal responsibility is shared among more players after SOX, and the degree of asymmetric information between the issuer and the underwriter may be reduced as well, which should have a mitigating impact on underwriting fees. In fact, Kaserer and Kraft (2003) documented that underwriting fees increase monotonically with the degree of complexity in an IPO, and that underwriting fees are significantly lower for less volatile stocks. Overall, we do not have a clear prediction of the impact of SOX on the net effect on the underwriting fees.…”

“…With respect to the analysis of the direct costs, we restrict this sample to the period 1998 to 2007, i.e. 1,116 IPOs, as flotation costs are not subject to similar extreme and perennial cycles to those underpricing is (Kaserer and Kraft 2003). One major problem in this paper is how to disentangle the influence coming from the SOX enactment from influences coming from other risk factors, e.g., the economic downturn experienced during the period 2001 to 2003, the increased risk premiums in the aftermath of the 9/11 event, etc.…”

Factors Influencing the Direct Costs of Property Trust Ipos

“…The difficulty is however in the measuring of "complexity". Kaserer and Kraft (2003) suggest it is not easy to justify why an IPO's complexity is inversely related to size. They find that German IPOs (from 1993 to 1998) do not seem to benefit from economies of scale.…”