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Asymmetric Information, Market Power, and the Underpricing of New Stock Issues in Germany, 1882–1892

Published online by Cambridge University Press:  01 September 2010

Caroline Fohlin
Caroline Fohlin*
Affiliation:
Research Professor of Economics, Department of Economics, Johns Hopkins University, Mergenthaler Hall, 3400 N. Charles St., Baltimore, MD 21218. E-mail: [email protected].
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Abstract

Investors in new stock issues in Germany in the 1880s experienced low spreads between the price they paid for stock and the price at which they could sell the stock in the market. Stock issuing companies paid substantial fees to underwriting banks, and these costs increased with the underwriter's market share. Bank's faced lower issuing costs than did nonfinancial firms. These patterns are consistent with a situation in which underwriters exploited their access to better information (agency problems) and had market power, but do not support the supposed lemons problems that motivated the imposition of stringent regulations in 1896.

Type
ARTICLES
Information
The Journal of Economic History , Volume 70 , Issue 3 , September 2010 , pp. 630 - 656
Copyright
Copyright © The Economic History Association 2010

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