Financial competitiveness – part 3

James Surowiecki of the New Yorker takes exception to the prevailing wisdom that New York is losing its competitive advantage in issuing IPOs due to over-regulation:

To begin with, many of the world’s biggest I.P.O.s in recent years have been privatizations of state-owned companies in Europe and China, which for political reasons were never likely to happen in the U.S. Also, corporate executives prefer to take their companies public in bull markets, which improves their chances of getting a high price for their shares, and foreign markets have lately done better than the U.S. market. London and Hong Kong are also cheaper than New York: the commissions that investment banks charge to take companies public there can be about half what they are in the U.S. More broadly, globalization—a force that Wall Streeters applaud when it comes to textile plants and call centers—has increased competition. Many foreign exchanges, like Hong Kong’s, are now far more liquid and open, and they also have much tougher regulations (often modelled, ironically enough, on those of the U.S.) than they once did. All this has made investors more willing to invest in them. Their market share has naturally increased as a result, particularly since, even in a global economy, companies prefer to list their shares closer to home.
Once you control for these factors, it becomes hard to find anything other than anecdotal evidence that regulations are doing serious damage to New York’s ability to attract foreign I.P.O.s. More important, it’s far from clear that a decline in foreign I.P.O.s would be a sign of future disaster anyway. After all, what matters to the fundamental health of an economy is its ability to attract capital and investors, not foreign listings. And there is no evidence that America’s attractiveness to investors has diminished. Its share of global stock-market activity in 2005 was actually three points higher than it had been a decade earlier. In the same period, the market capitalizations of the New York exchanges rose almost twice as fast as the market cap of the London Stock Exchange. And, according to the New York report, if you look at the annual growth in equities—which is what Sarbanes-Oxley would presumably be a drag on—you find something unexpected: from 2001 to 2005, the U.S. market grew significantly faster than that of Europe or the U.K. Does that really look like an industry crippled by regulation?

I agree that New York City and the US government need to take a hard look at the competitiveness of our financial markets. But I also agree that we need to get at the root conditions, not perceptions and set answers. Answers will come, but we need to ask the right questions. And right now, it is not clear that the right questions have yet been asked.

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