Sarbanes-Oxley & the Competitive Position of U.S. Stock Markets

Congress passed the Sarbanes-Oxley Act of 2002 (P.L. 107-204) to remedy weaknesses in accounting and corporate governance exposed by massive fraud at Enron Corp. and other firms. Criticism of the law, which has been fairly widespread among business groups, academics, and accountants, focuses on the costs of compliance, which are said to outweigh the benefits. Several studies and comments have argued that the rising cost of regulation has created incentives for firms to list their shares on foreign markets or to withdraw from the public markets altogether, weakening the international competitive position of U.S. stock exchanges. Specific evidence cited includes the fact that 24 of the largest 25 initial public stock offerings (IPOs) in 2005 took place on foreign exchanges, and that there has been a boom in the private equity market, where U.S. securities regulation is minimal. This book attempts to put instances like these in context by presenting comparative data on the world's major stock markets over the past decade.In terms of the number of corporations listing their shares, several foreign markets have shown faster growth than the major U.S. exchanges (the New York Stock Exchange (NYSE) and Nasdaq). However, these increases appear to be fueled primarily by growth in the number of domestic firms listing on their own national markets. While major foreign markets have seen significant declines in foreign listings as a percentage of all listings, U.S. exchanges have not been abandoned by foreign companies in significant numbers. Perhaps the most common reason for firms to delist, or leave a stock exchange, is a merger with another firm. Lower costs of regulation may be a side benefit of many mergers, but trends in interest rates and stock prices appear to be the primary determinants of merger activity. A rising number of corporate acquisitions result in the acquired firms "going private" -- becoming exempt from most regulation -- but this trend is also largely driven by economic conditions. Private equity investment has boomed since 2000 because debt financing has been abundant and relatively cheap, and because institutional investors have sought higher yields than what the stock and bond markets have provided. Figures on new issues of stock (including IPOs) are volatile, and annual data may be skewed by a few large deals. Certain foreign exchanges have recovered more quickly from the 2000-2002 bear market, but, on the whole, there is little evidence that the U.S. stock market is becoming less attractive to companies seeking to raise capital. When the bond markets are included, the role of the U.S. securities industry in capital formation appears to be as strong as ever. The data surveyed here suggest that rising regulatory costs have not precipitated any crisis in U.S. markets, and that the outcome of global competition among stock exchanges depends more on fundamental market conditions than on differentials in regulatory costs.