Do Regulatory Changes Affect the Underpricing of European IPOs?

Abstract

We use a sample of 3,677 European IPOs during the period 1998-2012 to examine how the adoptions of corporate governance codes by Member States of the European Union (EU) have affected IPO underpricing on Member State-regulated markets, where issuers are subject to corporate governance rules instituted by Member States, relative to a control sample of IPOs on exchange regulated markets, where issuers are exempt from Member State corporate governance codes. Using this control sample approach facilitated by the existence of second-tier, exchange regulated markets in the EU, we find that, on average, IPO underpricing declined on Member State-regulated markets after Member States adopted corporate governance codes containing SOX-like provisions. We do not find a similar reduction in IPO underpricing on exchange-regulated markets. Our results are robust to alternative specifications, and our findings support the view that elevating corporate governance standards increases transparency and reduces information asymmetries that affect IPO valuations.

Keywords: Initial public offerings, corporate governance, regulation, asymmetric information, underpricing

JEL Classification: G14, G15, G34, G38