Since the days of America’s first Treasury secretary, Alexander Hamilton, New York’s financial markets have driven and sustained the nation’s economy. And for the last century, companies worldwide that sought to raise capital overwhelmingly came to the United States.
Sadly, and distressingly, that era may be coming to an end, as companies looking for money on the public markets are increasingly going to Europe or Asia. In 2005, initial public offerings of stock in Europe surpassed those in America—in both number and dollar volume. Even as the American IPO market improved in 2006, that trend accelerated: According to PricewaterhouseCoopers, there were 651 IPOs in Europe last year, versus 224 in the U.S., and the European offerings raised almost $40 billion more dollars. China’s markets, with fewer IPOs, raised 30 percent more capital than those in the United States.
To some extent, America’s loss of position is inevitable. Other countries’ markets are becoming more sophisticated, and some of the loss in U.S. share is driven by the privatization of formerly state—owned enterprises in Asia and Eastern Europe.
Still, strong evidence indicates that America’s public exchanges have lost their privileged position as the market of choice, since the U.S. IPO decline over the past two years has been even more pronounced among “international” stock offerings—i.e., those from outside the home region. In the last quarter of 2006, U.S. exchanges attracted only nine international IPOs. European exchanges attracted 31, including companies from Australia, Pakistan, South Africa, Singapore—and five from the United States itself.
What explains the reversal of fortune for American capital markets? No fewer than three comprehensive studies in the past sixth months have sought answers, drafted respectively by a task force loosely formed by Treasury Secretary Hank Paulson; a blueâ€“ribbon panel sponsored by the U.S. Chamber of Commerce; and the consulting firm McKinsey and Company (where I once worked), hired by New York’s mayor and senior U.S. Senator, Mike Bloomberg and Chuck Schumer.
Two common threads emerged from these inâ€“depth reviews. First, America’s securities regulations have become overly burdensome, especially for smaller companies. The Sarbanesâ€“Oxley reforms of 2002—wellâ€“intentioned to correct the frauds that led to the collapse of Enron and WorldCom—have proved far more expensive to implement than anticipated. And with increased threats of criminal sanctions for corporate managers, directors, and auditors, the leaders of publicly traded companies in America have had to devote far more time to accounting and compliance issues than to growing their businesses.
Sarbanesâ€“Oxley also presented corporate leaders and auditors with new litigation threats, on top of already astronomical costs. Simply put, our competitor nations have nothing comparable to America’s system of private securities litigation, in which large law firms generate class action suits where one class of shareholders sues the company—in other words, all other shareholders—for stock price declines attributed to accounting restatements. While the number of such suits has declined in recent years as the stock market has recovered from the bursting of the dotâ€“com bubble, the cost of securities litigation settlements has exploded. Excluding the Enron and WorldCom settlements last year (each over $6 billion), the total value of securities settlements in 2006 was $10.6 billion, an increase of over 300 percent from 2005, according to a report released on March 21 by Cornerstone Research.
Any effort to reverse recent trends and return U.S. capital markets to their worldâ€“leading position should take serious account of the regulation and litigation issues. The three aforementioned studies have suggested concrete, achievable reforms, though in general, they have not gone far enough—as might be expected given the “task force” nature of two of the three efforts. These reports’ recommendations should thus be viewed as a beginning, not an ending, of our discussion about needed change.
America’s public financial markets have been vital to our economy’s creativity and dynamism, and they have afforded everyday Americans the ability to participate in and reap the rewards of corporate success. Thoughtful regulation is important to facilitate share pricing and to prevent corporate managers from defrauding their investors, but our anger over past corporate misconduct should not blind us to the real risks to common shareholders if American companies leave our markets.