Abstract

The emergence of an active IPO market was essential to the process of capital market development. A well-functioning market required the trust of public investors as ownership separated from control. Previous research has been inconclusive as to how effective were regulation and reputation in establishing the IPO market. In this paper we undertake a comparative study of the IPO markets between 1900 and 1913 in regulated Berlin and laissez-faire London, where two-thirds of IPOs occurred by way of the unregulated Special Settlement method. All IPOs on the Berlin stock exchange survived and on average they made money for investors and performed in line with the market. In London, however, as many as one in five Special Settlement IPOs failed and investors were wiped out. Whilst there were some long-term “winners” amongst these London IPOs, investors saw these gains overwhelmed by their losses. Here was early evidence that unregulated and uncertified IPO markets were bad for investor wealth.

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