If Foreign IPOs Are Booming, Do We Still Need Reform?

In recent months, several blue ribbon panels, concerned about the competitiveness of the U.S. securities markets, have proposed reforming U.S. securities regulation, on the theory that the regulatory burden that has driven overseas companies to list their shares outside the U.S. As I have discussed at length previously (most recently here), there are a host of reasons why overseas companies have been list their shares on other exchanges. But despite all of these reasons driving the growth of other countries’ markets, there nevertheless seems to be a continuing and arguably growing interest among overseas companies, particularly Chinese companies, to list their shares on U.S. exchanges.

According to the May 11, 2007 Financial Times article entitled “Chinese Listing Influx Begins” (here, subsciption required), 35 Chinese companies expect to list on U.S. exchanges this year, as many as listed in the last three years combined. Three Chinese companies – Qiao Xing Mobile, Acorn International and LDK Solar – together expect to raise $1 billion in U.S. listings.

A second May 11, 2007 Financial Times article entitled “New York Proves an Attractive Destination” (here) explains that the reason for the influx of Chinese companies is that “a pipeline of private equity and venture capital investments, mostly made by U.S. based funds…have reached maturity.” These companies are drawn to the U.S. markets and are not deterred by U.S. regulations because “despite Sarbox, they can still get better valuations and wider analyst coverage … than in the resurgent Chinese domestic markets or in other parts of the world.” Chinese companies have been drawn to the U.S., according to one commentator, because “they were looking to establish their brand internationally and nothing matches that like a U.S. listing.”

As one source quoted in an April 4, 2007 Law.com article entitled “Law Firms Compete for Chinese Companies’ IPO Action” (here) put it, “in China, everyone wants to get registered to raise funds in the public markets in the U.S.” A U.S. listing, another commentator in the article notes, “provides legitimacy and transparency.”

A prior post on the "healthy" U.S. market for foreign IPO market can be found here.

The Chinese companies’ perception that they will enjoy a better valuation on the U.S exchanges is supported by recent academic research. According to an April 2007 paper by Craig Doidge of the University of Toronto and George Andrew Karolyi and Rene Stulz of the Ohio State University entitle “Has New York Become Less Competitive Over Time? Evaluating Foreign Listing Choices Over Time” (here), there is a significant valuation premium for U.S. exchange listings, and the premium did not decline after the passage of SOX. The article go on to state that “all of our evidence is consistent with the theory that there is a distinct governance benefit for firms that list on the U.S. exchanges.” An April 27, 2007 Wall Street Journal article entitled “Maybe U.S. Markets Are Still Supreme” (here, subscription required) discusses the academics' research.

As I have previously argued (most recently here), the would-be reformers' case for regulatory reform is “weak.” But if, as further evidence increasingly seems to substantiate, overseas companies on balance find U.S. markets preferable to other markets, the case for reform goes from weak to nonexistent.

All of this underscores a point I have frequently made, that Wall Street may be attempting to use the effects of the evolving global financial marketplace as a pretext to undermine regulatory requirements that occasionally prove to be uncomfortable because they actually have teeth. The would-be reformers may claim that they seek to advance U.S. competitiveness, but anything that weakens the U.S regulatory structure could remove the greatest advantage the U.S. markets enjoy – that is, the U.S. markets are the most highly regarded precisely because they are the most highly regulated.

Over There, Over Here: As I have also frequently noted, overseas investors are becoming much more accustomed to using litigation as a means to hold management accountable. Further evidence of this can be found in a May 2007 Institutional Investor Services paper entitled “Accountability Goes Global: International Investors and U.S. Securities Class Actions” (here) takes a look at the growing role of overseas institutional investors as lead plaintiffs in U.S. securities class actions.

Among other things, the paper notes that “in every year since 2002, international institutional investors have filed lead plaintiff motions in more than 5% of all securities class actions,” including not only suits against companies that are domiciled in their home countries, but also suits against U.S.-based companies. The international institutional investors, drawn from 17 countries, sought to serve as lead counsel in 182 cases between 1996 and March 31, 2007.

The paper was written by Adam Savett, who also maintains the Securities Litigation Watch blog (here).

Hat tip to the 10b-5 Daily (here) for the link to the ISS paper.