Should we care about the decline in US IPOs?

Herb Greenberg, writing in today's WSJ, has a new take on the flight of IPOs from the US: maybe it's not such a bad thing because some of the lost companies shouldn't have gone public in the first place.

Greenberg is concerned about the rash of profit warnings issued by firms on London's Alternative Investment Market (AIM). This suggests that these companies have greater risk, so maybe we were better off without them.

Note that Greenberg's concerned not about a rash of fraud, but about a rash of risk that, as he notes, is inherent in the fact that these are smaller companies. I suppose that had to be the next step in the pro-SOX argument. But from the universe of riskier stocks will come the mainstays of the future. That's why limiting their financing or driving them to foreign markets is so perverse. Indeed, it strikes me as a sign of the times that the most dynamic capital markets in the world, the markets that have succeeded because they have managed to tame risk and use it productively, should now want to shun it.

Indeed, Greenberg's argument wouldn't convince me even if he could point to an increase in fraud in the stocks that went abroad.  A world with zero fraud is also a world with zero risk, and, again, that's not necessarily the world we want.

Greenberg's other evidence for his thesis is that IPOs are up rather than down in the US compared to last year. This means nothing: IPOs increase with the market and the market is up. We don't know how many would have happened but for SOX – that's the measure of the lost opportunity. But we do know that more IPOs are going abroad.

Finally, Greenberg theorizes that SOX is a "convenient scapegoat" for the real cause of the drop in IPOs – the increase in private money. Yes, that's another story you hear a lot. It seems to assume that "private" money has dropped from the sky. But there is nothing special about "private" money – it's just money. We still have to explain why the public deals of yesterday are private today, and this leads us back, to the prime suspect -- the regulatory environment.

Comments

[Darian Ibrahim]

I'm surprised when I see this sort of piece in the WSJ. In the NYT it's no surprise, but you expect a little more from the WSJ.

[M.D. Fatwa]

New York has seen a relative decline in IPOs since 1996, well pre-dating SOX, mostly as new foreign markets have adopted higher standards (including many SOX provisions). Also, IPOs aren't "going abroad"--they are staying abroad. Before, they were coming to the US. (These are foreign companies we are talking about. Very very few US companies are choosing to make their first listings abroad.) "But from the universe of riskier stocks will come the mainstays of the future"--but, since these are foreign companies, what does this mean to the US economy? US investors can still invest in companies listed on foreign exchanges. The losers, if there are any, are US exchanges who aren't benefiting from the listing fees. Otherwise, this particular effect on the US economy is minimal.

At the end of the day, this debate will be settled by the relative cost of capital. Has SOX lowered the cost of capital in the United States more than it has raised compliance costs? If not, SOX is an economic drain. However, if it has, SOX is a success, regardless of how burdensome it is for issuers. And if it has lowered the cost of capital more than raised compliance costs, issuers will eventually decide to suck it up when it comes to compliance, because they can't afford to miss out on the cheap money.

[Sam E. Antar (Former Crazy Eddie CFO & ex-felon)]

I respectfully disagree with your assessment of Herb Greenberg’s article:

“Note that Greenberg's concerned not about a rash of fraud, but about a rash of risk that, as he notes, is inherent in the fact that these are smaller companies.”

A careful reading of what he wrote is provided below:

“Seriously, maybe some of these companies shouldn't go public in the first place, especially if they fear or don't want to pay for laws that are attempting to crack down on skullduggery.

Before you think I've lost my mind, let's get something straight: I'm a big believer in free enterprise and fully understand the vital role of public markets in allocating capital to help companies grow. I also realize that laws can go too far in any direction; Sarbanes-Oxley is no different. But going public is a privilege, and companies going through the process should welcome scrutiny and encourage proper barriers to easy entry.”

My Comment:

The purpose of Sarbanes Oxley is not about protecting investors from business risk rather it is to increase the integrity of financial information which is the main pillar of our capitalist free market economic system.

I believe we can all agree that transparency in financial reporting benefits our great capitalist system.

Respectfully,

Sam E. Antar