Do Regulatory Changes Affect the Underpricing of European IPOs?

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