Signaling Mechanisms and Regulatory Impacts on the Underpricing of Initial Public Offerings by European Small and Medium-sized Enterprises

Abstract

This study investigates the determinants of IPO underpricing for European small and medium-sized enterprises (SMEs), analyzing signaling mechanisms and the impact of the EU Prospectus Regulation (2017/1129). Using 403 IPOs (2000-2025), this research employs multivariate regression and quasi-experimental difference-in-differences methodologies to evaluate how quality signals affect underpricing across firm sizes and to assess the impact of the regulation. The findings reveal that, contrary to traditional theory, venture capital backing and prestigious underwriters are associated with substantially higher underpricing. These signals appear to operate by setting high growth expectations rather than certifying quality. Notably, no systematic size-based underpricing differences exist between small, medium, and large European firms, contradicting information asymmetry predictions. Finally, the 2019 implementation of the EU Prospectus Regulation reduced SME underpricing substantially relative to larger firms, providing empirical support for proportionate regulation. The 2017 announcement had an insignificant effect, suggesting actual implementation drives market responses. These results challenge traditional IPO theories and offer insights for policymakers advancing the Capital Markets Union.