Does SOX explain the flight from NY?

I've been discussing how foreign firms' flight from NY to escape increased regulation, and resulting calls for deregulation, are a good example of the operation of the market for law. However, today's WSJ collects the arguments for the proposition that the flight from NY isn't about regulation:

• Other stock markets, such as Hong Kong's, have become better and deeper, so firms trade increasingly at home.
• Trading standards have standardized, so investors are willing to trade in other markets, such as Finland, which captured Nokia's trading.
• The move to private equity is global, and is occurring because the firms have so much cash because investors like the returns. Venture capital firms are selling to privately because it's "easier for them to recoup their entire investment by selling to another private-equity firm, rather than the small portion they typically sell in an IPO."
• Firms are concerned about the "pressure from Wall Street for stock and earnings performance" and not just about regulation.
• Other countries are tightening their rules, so "regulatory costs are in the process of converging."

These arguments state but don't answer the question of whether SOX and other US regulation is reducing NY listing business. As I've often discussed, e.g., yesterday, there is increasing evidence of SOX's negative effect on foreign firms trading in the US. This supports, even if it doesn't prove, causation. Nobody argues that SOX is the only cause. Foreign firms obviously would look at the features of both the US and foreign markets when making listing decisions. If SOX hurt them, this suggests that SOX might account for some of the flight.

In other words, even if other markets are improving, we should ask whether the US would be capturing more business than it is currently if we didn't have SOX and the threat of securities litigation.

The private equity explanation is circular. As I've often asked, where is the money coming from? The answer is the returns private equity can promise investors compared to other investment opportunities. Again, the question is why public markets aren't more alluring.

In any event, these arguments about other causes of the flight from NY don't suggest that the market for law isn't relevant. Economist Andrew Karolyi is quoted as saying that regulations "should be judged on their own merits and not on any evidence of a supposed decline in the attractiveness for prospective listings from overseas." That's misguided, because the market for regulation, like any other market, provides information about the "merits." If we're losing business, we should find out why.

However, the WSJ article does show that more data would be useful to explain the flight from NY.

Comments

[M. Hodak]

The Karolyi data is an excellent addition to the discussion of comparative market dynamics. However, the most persuasive evidence for the negative impact on SOX has been differences in the listings of the companies that could list anywhere, e.g., the biggest 20 IPOs of the last couple of years. This data shows an overwhelming preference for London or Hong Kong vs. the U.S., which I think is more indicative of regulatory impact between major markets.

In fact, I read Karolyi's data as supporting an increased urgency about jurisdictional competition. Without supporting or indicting any particular regulatory regime, it underscores that companies around the world have more choices about where to list. We'd be foolish to ignore that in our rulemaking.