Regulating IPOs: Evidence from Going Public in London and Berlin, 1900-1913

Abstract

We revisit debates on the regulation of IPOs by analyzing failure rates of IPOs carried out between 1900 and 1913 on the London and Berlin stock exchanges, two of the leading financial markets during the early 20th century. IPOs were regulated more heavily in Germany than in Britain and, as might be expected, the failure rate of IPOs on the Berlin Stock Exchange was lower than it was on the London Stock Exchange. On the other hand, the failure rate of IPOs obtaining an “Official Quotation” on the London Stock Exchange was almost as low as Berlin’s. Moreover, while tough regulation of IPOs can result in a counterproductive restriction of investment choice, in the case of a London Stock Exchange junior market known as the Special Settlement sector post-IPO performance was sufficiently poor to suggest that tighter regulation would have been beneficial to the average investor.

Keywords: law and finance, initial public offering, regulation, investor protection, financial history

JEL Classification: G14, G18, G24, G32, G38, K22, N23