Economies of scope and IPO activity in Europe

Initial public offering (IPO) activity in Europe has recently come to a near halt, due to the ‘Panic’ of 2008 and the Eurozone crisis of 2011. The 280 companies going public on the London, Euronext, Frankfurt, and Milan stock exchanges from 2008 to 2011 is fewer than the 353 companies going public in 2007 alone. An analogous dearth of IPOs has occurred in the US, as documented in Gao et al. (2012). Gao et al. discuss three hypotheses that have been proposed to explain the low volume of IPOs in the US during 2001–11. First, the Sarbanes–Oxley Act (hereafter, SOX) of 2002 made going and staying public more costly, owing to additional compliance requirements, and the reduction in bid–ask spreads from 1994 to 2001 and Regulation FD in 2000 led to a reduction in analyst coverage for smaller firms that decreased the attractiveness of going public. Supporters of the ‘regulatory overreach’ hypothesis argue that the combination of these effects significantly lowered the market valuation of small publicly traded firms, discouraging other IPOs.