Editor's Note: Brian Cheffins is Professor of Corporate Law at the University of Cambridge. The following post is based on an article co-authored by Professor Cheffins, David Chambers of Cambridge Judge Business School, and Carsten Burhop of Max Planck Institute for Research on Collective Goods.

Since World War II, Germany’s stock market has been mostly an after-thought, despite a highly successful economy. Why might this be the case? Explanations have included the power and influence of banks, the stakeholder-oriented nature of Germany’s economy and Germany’s civil law heritage. In Law, Politics and the Rise and Fall of German Stock Market Development, 1870-1938 we argue, based on statistical analysis of a hand-collected dataset of initial public offerings (IPOs), that a combination of law and politics during the late 19th and early 20th centuries played a significant role in the evolution of German equity markets. For most of this period Germany had, contrary to the present-day pattern, a stock market that was sizeable in comparative terms. The law helped to foster this trend but legal reforms during the Nazi era reversed matters in a way that had lasting consequences.

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" /> Editor's Note: Brian Cheffins is Professor of Corporate Law at the University of Cambridge. The following post is based on an article co-authored by Professor Cheffins, David Chambers of Cambridge Judge Business School, and Carsten Burhop of Max Planck Institute for Research on Collective Goods.

Since World War II, Germany’s stock market has been mostly an after-thought, despite a highly successful economy. Why might this be the case? Explanations have included the power and influence of banks, the stakeholder-oriented nature of Germany’s economy and Germany’s civil law heritage. In Law, Politics and the Rise and Fall of German Stock Market Development, 1870-1938 we argue, based on statistical analysis of a hand-collected dataset of initial public offerings (IPOs), that a combination of law and politics during the late 19th and early 20th centuries played a significant role in the evolution of German equity markets. For most of this period Germany had, contrary to the present-day pattern, a stock market that was sizeable in comparative terms. The law helped to foster this trend but legal reforms during the Nazi era reversed matters in a way that had lasting consequences.

Click here to read the complete post...

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German Stock Market Development, 1870-1938

Brian Cheffins is Professor of Corporate Law at the University of Cambridge. The following post is based on an article co-authored by Professor Cheffins, David Chambers of Cambridge Judge Business School, and Carsten Burhop of Max Planck Institute for Research on Collective Goods.

Since World War II, Germany’s stock market has been mostly an after-thought, despite a highly successful economy. Why might this be the case? Explanations have included the power and influence of banks, the stakeholder-oriented nature of Germany’s economy and Germany’s civil law heritage. In Law, Politics and the Rise and Fall of German Stock Market Development, 1870-1938 we argue, based on statistical analysis of a hand-collected dataset of initial public offerings (IPOs), that a combination of law and politics during the late 19th and early 20th centuries played a significant role in the evolution of German equity markets. For most of this period Germany had, contrary to the present-day pattern, a stock market that was sizeable in comparative terms. The law helped to foster this trend but legal reforms during the Nazi era reversed matters in a way that had lasting consequences.

Our hand-collected IPO dataset takes into account each IPO carried out on the Berlin Stock Exchange, the leading German market, for each year from 1870 to 1938. This dataset is well-suited for providing insights concerning German stock market trends for a couple of reasons. First, IPOs constitute a bellwether for stock market development in that a well-developed equity market cannot take shape unless numerous public offerings occur where a large proportion of those firms go on to survive as publicly listed firms. More pragmatically, due to the absence of time-series data on stock market capitalization, in the German context IPO data constitute the only means of assessing stock market development on a year-by-year basis going back through time.

Approximately 15 firms per year went public in Berlin between 1870 and 1938, or approximately one IPO every three weeks. There was considerable year-on-year variation, with major IPO waves occurring in the early 1870s and early 1920s. The survival rate, determined by whether a company that went public was traded on the Berlin Stock Exchange five years after the IPO, was 85% overall but was only 60% prior to the early 1880s.

In order to explain variations in the survival rate we ran regressions that took into account variables such as firm age, firm size, the type of industrial activity, the legal regime in place and the nature of the underwriter of the IPO. Our results indicate that IPO survival rates can be explained to a significant extent by statutory reforms occurring in 1884 and 1896 that imposed various obligations on companies going public that were ostensibly intended to protect investors. Our results also indicate prestigious underwriters further bolstered the IPO survival rate. Nevertheless, given that the legal regime in place remained a meaningful determinant of IPO success even once allowances were made for proxies for underwriter quality, law stands out as a determinant of stock market development in Germany in the late 19th and early 20th centuries.

Germany suffered a historically renowned bout of hyperinflation in the early 1920s, which conceivably could have devastated investor confidence in equity markets. Our dataset indicates, however, that IPO levels were near historical norms for the remainder of the 1920s. While hyperinflation did not deal a mortal blow to IPO activity in the 1920s, IPOs disappeared in Berlin in the following decade. The absence of IPOs in the 1930s precludes any econometric analysis. Instead, we dissect the legal and regulatory reforms of this decade to explain the disappearance of the IPO market.

We acknowledge in our analysis of the 1930s that the collapse of the German IPO market commenced with a banking and currency crisis occurring in 1931-32. We show, however, that changes made after the Nazis came to power in 1933 were decisive. The Nazis imposed stringent controls on markets to foster the financing of rearmament but also introduced reforms that survived the Nazi era that made corporate governance considerably less shareholder friendly. Hence, legal changes—admittedly engendered by the extreme politics of Germany in the 1930s—contributed substantially to the disappearance of IPOs and dealt German equity markets a blow that would be felt for decades thereafter.

The full paper is available for download here.

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