Corporate Finance in Germany: Structural Adjustments and Current Developments

• DOI: http://doi.org/10.1111/jacf.12145
• Author: Wolfgang Bessler,Wolfgang Drobetz
• Date: 01 December 2015
• Published date: 01 December 2015

In This Issue: German Capital Markets and Corporate Governance

Law and Corporate Governance: Germany within Europe 8Klaus J. Hopt, Max Planck Institute for Comparative and

International Private Law, Hamburg, Germany

Corporate Governance in Germany: Recent Developments and Challenges 16 Marc Steffen Rapp, Philipps Universität Marburg,

and Christian Strenger, HHL Leipzig Graduate

School of Management

The Survival of the Weakest: Flourishing Family Firms in Germany 35 Julian Franks, London Business School, Colin Mayer,

Saïd Business School, University of Oxford,

Hannes F. Wagner, Bocconi University

The Bug At Volkswagen: Lessons in Co-Determination, Ownership, and

Board Structure

27 Charles M. Elson, University of Delaware, Craig K. Ferrere,

Harvard Law School, and Nicholas J. Goossen,

University of Delaware

Corporate Finance in Germany: Structural Adjustments and Current Developments 44 Wolfgang Bessler, Justus-Liebig University Giessen and

Wolfgang Drobetz, Hamburg University

The Cross-Listing and Cross-Trading of German Companies

in the U.S. and of Foreign Companies in Germany

58 Wolfgang Bessler, Justus-Liebig University Giessen,

Fred R. Kaen, University of New Hampshire, and

Colin Schneck, Justus-Liebig University Giessen

Stock Liquidity and the Cost of Equity Capital in Global Markets 68 Yakov Amihud, New York University, Allaudeen Hameed,

National University of Singapore, Wenjin Kang, Renmin

University of China, and Huiping Zhang, JCU Singapore

Cash Equity Markets in Germany 75 Peter Gomber, Goethe University

Bund for Glory, or It’s a Long Way to Tip a Market 81 Craig Pirrong, University of Houston

Derivatives and Repurchase Markets in Germany 88 Thomas Book, CEO, Eurex Clearing

Transaction Costs for German Institutional Investors:

Empirical Evidence from Stock Markets

96 Lutz Johanning, WHU—Otto Beisheim School of Management,

and Marc Becker and Arndt Völkle, XTP GmbH

International Evidence on Value Creation in Private Equity Transactions 105 Benjamin Puche, Reiner Braun, and Ann-Kristin Achleitner,

Technische Universität München, Center for Entrepreneurial

and Financial Studies

VOLUME 27 | NUMBER 4 | FALL 2015

APPLIED CORPORATE FINANCE

Journal of

44 Journal of Applied Corporate Finance • Volume 27 Number 4 Fall 2015

Corporate Finance in Germany:

Structural Adjustments and Current Developments

1. For studies of global corporate funding in the 1970s and 1980s, see Mayer (1988,

1990). Full citations of all studies cited in footnotes are provided in the References at the

end.

2. See Credit Suisse (2005).

3. For an account of the structure of market segments at Deutsche Börse and market

segment transfer decisions by “Neuer Markt” IPOs, see Bessler and Schneck (2015).

4. See Deutsche Bundesbank (2013).

5. See IKB (2014). These numbers relate to German mid- and small-cap rms.

or public companies in most countries, even t hose

with “market-based” corporate f inancing and

governance systems like those in the U.S. and

U.K., by far the largest source of f unding is “inter-

nal nance”—t hat is, retained ear nings. In most countries,

once companies become listed on stock exchanges through

initial public oerings (IPOs), the markets for “seasoned”

equity oerings (SEOs) have generally proved to be a minor

source for raising capital —and bond markets have been an

important source of corporate nancin g only in the U.S.1

German companies, at least in the past, have relied even less

than others on outside capital markets to fund their operations

and growth opportunities. Reecting the long dominance of

the “Hausbanken” system in Germany, bank loans continued

throughout the 1990s and early 2000s to account for well over

half of the total external funds raised by listed German compa-

nies, while only 3% of all external funds came from bond issues.

But there were also notable signs of change during this time.

Perhaps most important, the total net proceeds from issuances

of new shares on German stock exchanges—including IPOs as

well as SEOs—accounted for as much as 35% of all external

funds raised by German companies.2

is increased relia nce on outside equity was driven

initially by the wave of IPOs on the Ger man “Neuer Markt”

(New Market), a new stock market segment that wa s estab-

lished at Deutsche Börse in 1997 and lasted until the end of

2003 (see Figure 1), when it was closed and the companies

moved to other market segments.

3

e second major raising of

equity by German companies c ame in two clusters: a second

wave of IPOs during the period 200 4-2007, and a larger

number of corporate seasoned equity oerings (SEOs) during

the global nancia l crisis of 2008-2011, when banks were not

able to provide external nancing , and when corporate bond

markets suered from t he European sovereign debt problems.

is shift by Germa n companies toward greater use of

market-based nancing i s reected in recent data on German

corporate funding sources and capital market ac tivity. In

2012, for example, internal sources continued to account

for a large fraction—77% —of all nancing by German

rms.

4

And the largest sou rce of external corporate nanc-

ing continued to be working capital na nce in the form of

trade credits and prepayments, representing wel l over half

(56%) of all funds raised. But in that sa me year, the bond

markets provided a third of the ex ternal funding for German

companies—a nd stock markets provided 9%.5 Moreover, the

companies’ net reliance on bank loa ns that year was actually

negative (-9%), as companies repaid some of their bank loans,

or chose not to extend existing loans or apply for new ones.

Among the explanations for t he reduced reliance on bank

loans by German companie s, the two most important are the

larger equity ratios th at banks required of industrial compa-

nies when providing them with loans, a nd the higher equity

requirements the banks t hemselves had to comply with under

the changes in t he Basel Accords. Such regu latory changes

led not only to higher interest rates on loans, but to a severe

reduction of credit lines and a larger number of rejections

of corporate loan applications. e increase in t he capital

requirements for German bank s in the wake of the globa l

nancial crisi s together with the banks’ dicultie s in raising

new equity contributed to their decisions to cut the size of

their loan portfolios.

However, it’s not only the banks’ new capita l burdens and

other troubles that have caused Germa n companies to make

greater use of capital market s. e introduction of the Euro

as a common currency in 2002 , by encouraging t he integra-

tion of capital markets in Eu rope, has also contributed to the

development of German and European capital ma rkets. For

many German companie s, these developments together with

signicant cha nges in corporate governance —particula rly

those resulting from the ban ks’ sales of their equity stakes in

industrial companie s and the associated departures of ba nkers

from supervisory boa rds—appear to have provided a welcome

opportunity to escape t he “lock-in” eect of their pas t reliance

on German banks.  is dependence on the banks may well

have prevented many of these companies from ta king advan-

tage of valuable opportunities for grow th, including greater

investment in R&D—inves tment that tends to be funded

mainly by equity rather t han debt.

by Wolfgang Bessler, Justus-Liebig University Giessen

and Wolfgang Drobetz, Hamburg University

F