Tuesday, February 20, 2007

Foreign IPO Activity in U.S Remains “Healthy”

Regular readers know that I have previously questioned (most recently here) the case for regulatory reform. Among the grounds the reformers routinely cite as the basis for regulatory reform is the U.S.’s loss of global IPO marketshare. A February 20, 2007 Wall Street Journal article entitled “Do Tough Rules Deter Foreign IPO Listing in the U.S.?” (here, subscription required) reports the findings of a recent study by Thomson Financial which found “little evidence of foreign companies shying away from U.S. exchanges since the adoption of Sarbanes-Oxley.” Thomson Financial apparently studies new stock issues in the past 20 years and concluded that “in terms of dollars raised, foreign IPO activity in the U.S. looks very healthy indeed.”

The study found that foreign IPOs (excluding investment funds and closed end funds) accounted for 16% of 2006 IPOs in U.S. exchanges, the highest proportion in the 20-year period studied. In addition, the $10.6 billion raised in foreign company offerings represents 26% of 2006 IPO volume, the highest level since 1994. According to the study’s author, “the statistics show that things look rather healthy” and that even after Sarbanes-Oxley, “there doesn’t seem to be any really significant deterioration of the IPO market.”

The competitive challenge for the U.S. markets is not that they can’t attract foreign companies' listings, it is that financial activity in general is increasingly global, and that global growth has more to do with what is happening overseas than with the state of regulation in the U.S. markets. As the February 20, 2007 Bloomberg.com article entitled “IPOs Shun U.S. Exchanges While Wall Street Collects Record Fees” (here) points out, activity on overseas markets may be booming, but “it is not that America’s economy and markets are shrinking – it is that the other ones are growing.” The article also notes that “for companies based in Europe, the Middle East and Asia, the choice of where to raise capital often comes down to geography and time zones.”

The increasing competitiveness of the global financial marketplace is due to a host of causes, most having nothing to do with the level of regulatory scrutiny in the U.S. As I have noted in prior posts, we should be wary of allowing the effects of larger global financial forces to serve as a pretext for reducing the level of regulation in our markets. The evidence above does not support the hypothesis that foreign companies are unwilling to list their shares here, and the increased financial activity overseas has no relation to the level of regulatory rigor in this country.

There is, however, one area, where the U.S. securities markets clearly are at a competitive disadvantage – cost. As the Bloomberg article notes, “for all the talk about keeping U.S. markets competitive and safeguarding jobs, the reality is that investment banks have helped price the U.S. out of the global IPO market.” U.S firms charge more to underwrite shares than do firms elsewhere; according to Bloomberg, U.S. investment banks charged fees averaging 4.4 percent of the value of stock sales in 2006, by comparison than 2.3 percent in Europe.

Whether or not the higher underwriting costs for listing in the U.S. really are deterring foreign business, cutting costs would be a particularly easy way to remove at least one impediment to doing business here, and it is a step that doesn’t require any governmental authority’s cooperation to accomplish. At a time when U.S. financial firms are booking record profits, this seem like a reasonable first step toward removing impediments to the competitiveness of the U.S markets.

In my commentary on reform proposals, I have also frequently noted (refer here) that other countries' reforms are narrowing differences between the U.S. and other countries. An article in the February 17, 2007 issue of the Economist magazine entitled "If You Can't Beat Them, Join Them" (here, subscription required) comments that while European business interests may not welcome American style class action lawsuits, "welcome or not, class action lawsuits are on the way." Britain, Netherlands, Germany and Spain all already permit some form of collective action, and Italy and France are considering their own versions. (France recently tabled its version until after the May elections.) To be sure, these European versions lack many of the attributes of American class action litigation, including contingent fees, jury verdicts on damages, and the possibility of punitive damages awards. The Economist declares that these new forms of collective action deserve a "caution welcome" because they permit efficient resolution of widespread claims, and because they provide injured European investors a way to seek remedies without having to resort to U.S. courts.

Reasonable minds can disagree over whether the differences or similarities between the U.S and the European models of collective civil actions are most important now. But as global investors become more accustomed to seeking judicial remedies for management misconduct, the similarities will matter more than the differences.

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