The latest news on SOX vs. US capital markets

A WSJ editorial notes the latest report by the Committee on Capital Markets Regulation. Here's some highlights from the editorial

• the delisting of foreign companies from U.S. markets leapt this year -- to 56 so far, up from 30 in 2006 and 12 a decade ago. Those 56 represented 12.4% of all listed foreign companies.
• Between 1996 and 2001, a mere three American companies went public by listing only on a foreign exchange. In the first three quarters of this year, 15 firms made the same choice. That's 9.2% of all U.S. initial public offerings in that period.
• since 2002 four out of five foreign companies that chose to raise capital in the U.S. through an IPO did so outside publicly traded exchanges. . . . To put it another way, 80% of the foreign companies that do raise capital in the U.S. do so outside of the reach of most of the laws that are supposed to protect investors. These companies must think the costs of complying with regulation and avoiding litigation are no longer worth the benefits of a ticker symbol on the New York Stock Exchange.

Here's the Report's executive summary:

By any meaningful measure, the competitiveness of the U.S. public equity market has deteriorated significantly in recent years. We gathered data from a variety of sources—including exchanges, the World Federation of Exchanges, financial databases and market participants—for 13 separate measures of competitiveness. These measures fall into five categories: (1) equity raised in public markets; (2) the relative size of the private Rule 144A and public equity markets in the U.S.; (3) cross-listings and delistings by foreign companies; (4) trading on U.S. and non-U.S. stock exchanges; and (5) regional origin of U.S. investment banking revenue. For each measure, we went back to the mid- 1990s, or, if later in time, as far back as a consistent time series would permit. Every single measure we looked at shows a significant deterioration in U.S. competitiveness, with one exception (which remained flat). Since we first called for urgent action to address the problem in 2006, most measures either have continued to decline or failed to substantially improve.

SOX defenders will trot out their usual arguments. For example, they might say how do we know this was a SOX effect? Well, we can look at direct evidence of whether SOX hurt firms. Here's Kate Litvak's recent paper: Long-Term Effect of Sarbanes-Oxley on Cross-Listing Premia:

I measure cross-listing premia as the difference between the Tobin's q of a cross-listed company and a non-cross-listed company from the same country matched on propensity to cross-list (first difference).. . . The overall evidence is consistent with the view that SOX negatively affected cross-listed premia, and particularly hurt riskier firms and firms from well-governed countries, while perhaps helping high-growth firms from poorly-governed countries.

Or SOX defenders might say that it's not all SOX. For example, this is partly a story of the rise of non-US exchanges. And, yes, firms have more places to go to raise money. But the problem is that, with SOX, the US gave them a big reason to go there.

Also, pro-SOXers may point out that it's mainly the riskier stocks that are going abroad. But even if this is true, those stocks have an important place in the US markets.

The big question is not whether we have a problem, but what we're going to do about it. Alas, probably not much. But we might keep this in mind the next some big plan comes along to outlaw fraud or otherwise "fix" the markets.

Comments

[save_the_rustbelt]

Let us allow the latest fraud festival (mortgages and fallout) to play out before we repeal Sox.

Besides, how can my former Congressman get filthy rich if we repeal his namesake?

Integrity would cure much of the problem. I'm waiting.

[roland]

Do you have more confidence in financial statements that the CEO and CFO have signed off on (Sarbox) or in statements that they have not (pre-Sarbox)?