is new york really losing its competitive advantage in global capital markets? professor andrew...
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Is New York Really Losing its Competitive Advantage in Global Capital Markets?
Professor Andrew Karolyi
A Keynote Presentation at Hofstra University’s Merrill Lynch Center Conference on Stock
Exchange Competition and International Listing
Is New York Really Losing?
• Where have we been?– Key trends in cross-listings around the world– Academic research: why do firms cross-list globally?
• Where are we now?– Recent developments in global competition– New controversies, new ideas, new evidence
• Where are we going?– How are regulatory authorities responding?– The potential risks and opportunities
The First Question: The Recent Past• Where have we been?
– Key trends in cross-listings around the world– Academic research: why do firms cross-list globally?
• Where are we now?– Recent developments in global competition– New controversies, new ideas, new evidence
• Where are we going?– How are regulatory authorities responding?– The potential risks and opportunities
Key Trend in International Listings• During the 1990s, many firms from around the
world were increasingly attracted to U.S. capital markets, especially the equity markets and by means of listings on major exchanges– By 2002, almost 2,000 firms listed from 88 countries– Five-fold increase in trading activity over decade– Cumulatively, over $175 billion in equity capital raised
Growing number of listings…..
0
500
1000
1500
2000
2500
# o
f lis
tin
gs
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Number of Foreign Listings in U.S. Markets
Rule 144a Level 1 OTC Exchange
Trading activity ramped up….
Trading in Listed ADR Programs on NYSE/Nasdaq
0
5
10
15
20
25
30
35
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
An
nu
al S
har
e V
olu
me
(Bil
lio
ns
of
shar
es)
New York vs the Competition
Foreign Stock Listings on Major World Exchanges
0
100
200
300
400
500
600
700
800
900
1986 1990 1995 2000
Number of Listed Foreign
Companies
NYSE/NasdaqLondonTokyoZurichParisFrankfurtToronto
Source: World Federation of Stock Exchanges, 2007
Research also picked up steam…• In 1990, only few studies focused on international listings;
by 2000, well over 250 in Finance, Accounting, IB, Strategy
• The “$64,000 question”: Why do firms list internationally?
• Many surveys conducted, theories proposed & tested:– To circumvent investment barriers that block foreign investors– To achieve greater liquidity in trading of shares– To increase analyst coverage– To access larger, deeper pools of capital– To increase overseas sales and profits
Market Segmentation Hypothesis• Consensus emerged around importance of access to
capital in the U.S. and of overcoming the penalizing role of foreign investment barriers in the home country – The “market segmentation” hypothesis
• Strong empirical support:– Positive share price reactions to announcements of international
listings in U.S. (Miller, 1999; Foerster & Karolyi, 1993, 1999)– Large declines in market risk exposures and thus cost of capital
around listings (Karolyi, 1998), among others– Especially for firms from emerging markets– Especially for firms that raise capital at time of listing
Unanswered questions…..
• Why do firms still seek access even though barriers falling?• Why do some firms from same country come, others not?• Why do so few firms seek access to U.S.?
US Listed vs Purely Domestic Companies Around the World(Thomson Financial Worldscope Universe)
8
35
9 220
66
171 2 6
28 230
44 47
2 2 213
110
13 1025 21
3 8 0 3 9 5 7 152 10 7
217 2
102
6
-13
-54-33-26
-83
-133
-34
-10
-49 -39-24
-143
-76
-43
-7 -4
-49
-178
-152
-21
-58
-24-37
-9 -3-27 -25
-84
-14
-56 -53-73
-141
-73
-21-3
-251
-197
-300
-250
-200
-150
-100
-50
0
50
100
150
Arg
entin
a
Aus
tral
ia
Aus
tria
Bel
gium
Bra
zil
Can
ada
Chi
le
Col
ombi
a
Den
mar
k
Fin
land
Fra
nce
Ger
man
y
Gre
ece
Hon
g K
ong
Indi
a
Indo
nesi
a
Irel
and
Isra
el
Ital
y
Japa
n
Kor
ea
Mal
aysi
a
Mex
ico
Net
herla
nds
New
Zea
land
Nor
way
Pak
ista
n
Per
u
Phi
lippi
nes
Por
tuga
l
Sin
gapo
re
Sou
th A
fric
a
Spa
in
Sw
eden
Sw
itzer
land
Tai
wan
Tha
iland
Tur
key
UK
Ven
ezue
la
US
Lis
ted
Com
pani
es (
+)
Non
-US
-Lis
ted
Com
pani
es(-
)
Only 1 in 10 eligiblepublicly-traded firmslisted in U.S.:• Japan – 110:1258• Germany – 23:251 • UK – 102:500• Canada – 66:133
-1258 -500
Why do so few firms cross-list?
• A better explanation: “bonding” hypothesis– Some firms need to improve governance to access capital to
finance growth; others not growing or have adequate capital– If poor investor protections in home market, firm can improve
governance by “bonding” to a better environment = U.S. markets
• Important predictions from “bonding”:– Firms that choose to improve governance by listing in U.S.
should gain a valuation premium relative to peers that stay home– Premium is higher for those from countries with poor protections– Premium increases in growth opportunities, especially for those
from countries with poor protections
The “cross-listing premium”
Doidge, Karolyi & Stulz, 2004, “Why are foreign firms listed in the U.S.
worth more?” Journal of Financial Economics
Key findings:• On average, 13.7% higher Tobin’s q ratio for U.S. listed• But 29.8% for firms listed on major U.S. exchanges• Stronger for firms from countries with poor protections
All cross-listings NYSE/Nasdaq listings only
Large blockholders deter listing
Controlling Shareholders Around the World
0%
10%
20%
30%
40%
50%
60%
70%
Be
lgiu
m
Fin
lan
d
Fra
nce
Ge
rma
ny
Ho
ng
Ko
ng
Ind
on
esi
a
Ire
lan
d
Ita
ly
Jap
an
No
rwa
y
Ph
ilip
pin
es
Po
rtu
ga
l
Sin
ga
po
re
So
uth
Ko
rea
Sp
ain
Sw
ed
en
Sw
itze
rla
nd
UK
Me
dia
n F
ract
ion
of
Sh
are
s C
on
tro
lled
by
La
rge
st B
lock
ho
lde
r
Domestic FirmsUS Cross-listed Firms
Doidge, Karolyi, Lins, Miller & Stulz, “Private benefits of control, ownership and the
cross-listing decision” Journal of Finance,
forthcoming
Key findings:• Median fraction held by controlling blocks is 24% for U.S. listed firm vs 35% for non-cross-listed domestic firm• Higher valuation premium, greater analyst coverage upon U.S. exchange listing for those with controlling blockholders
The Second Question: The Present
• Where have we been?– Key trends in cross-listings around the world– Academic research: why do firms cross-list globally?
• Where are we now?– Recent developments in global competition– New controversies, new ideas, new evidence
• Where are we going?– How are regulatory authorities responding?– The potential risks and opportunities
New Developments in Competition• Recently, London’s share of global cross-listings is
increasing and New York’s share is decreasing
• Many conclude that New York is less attractive now as a result of the Sarbanes-Oxley Act, 2002
• Many observers conclude that New York is less attractive now as a result of Sarbanes-Oxley Act, 2002– Committee on Capital Markets Regulation (2006)– US Chamber of Commerce Commission on Regulation of US Capital
Markets in the 21st Century (March 2007)– McKinsey Report “Sustaining New York’s and the US’ Global Financial
Services Leadership” (2006)
The Anti-SOX Lobby
New Doidge, Karolyi & Stulz study
• “Has New York become less competitive than London in global markets? Evaluating foreign listing choices over time” forthcoming Journal of Financial Economics
• How have the foreign listing flows changed over time?
• Have the determinants and consequences of foreign listing decisions in New York & London changed over time?– Are the characteristics of listing firms and how they influence listing
choices changing?– Have the net benefits of US and UK listings changed?
• Decline in benefits of US listings?• Greater benefits of UK listings?
What do we find?
• Listing flows are indeed changing, but…… – US listings have indeed declined, UK listings have increased– But decrease in UK Main Market listings; increase in UK due to AIM– And trends seem to have started well before SOX passage in 2002
• Characteristics of listing firms changing little & how they relate to listing choices are not changing at all– AIM firms are different than other listing firms– Listing choices on major exchanges not changing dramatically over time– Controlling for characteristics, no evidence of a US listing “deficit”
• Benefits of US listings have not declined– US listing premium persists each year and does not decrease after SOX– No listing premium for UK firms ever
U.S. listings: 1990 – 2005
0
500
1000
1500
2000
2500
# o
f li
stin
gs
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Rule 144a Level 1 OTC Exchange
• Substantial increase during the 1990s for all listings
• Decrease in exchange listings starting in 2002
U.K. listings: 1990 – 2005
0
500
1000
1500
2000
2500
# o
f li
stin
gs
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
AIM DRs Ordinary
• More ordinary listings than NY in early 1990s, but little growth during the 1990’s
• Recent decline in ordinary listings
• Recent growth is due to AIM
Flows slowed before 2002 & also in U.K.
U.S. Exchange Listings and Delistings
-100
-50
0
50
100
150
200
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Nu
mb
er o
f li
stin
gs/
del
isti
ng
s
ListingsDelistings
U.K. Exchange Listings and Delistings
-100
-50
0
50
100
150
200
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Nu
mb
er
of
listi
ng
s/d
elis
tin
gs
Listings
Delistings
• New US exchange listings peak in 2000 and slow thereafter; delistings outpace from 2001
• OTC and 144a new listings (not shown) outpace delistings
• New UK Main Market listings slow since 1996; delistings outpace from 1999
• AIM (not shown) drives UK listings
Declining propensity to list? No!• A decline in the competitiveness of New York should result in a
smaller fraction of actual relative to the expected number of existing or new listings predicted by model BUT we find a U.S. listing SURPLUS!
Panel a. U.S. exchange listings.
Listing stock
Listing flows
Year Firms Listed Actual % Expected
% Expected - Actual
Firms
New listings
Actual % Expected
% Expected -
Actual
1990 – 2001 (average) 3,765 170 4.515 3,609 14 0.388
2002 4,738 343 7.239 3.811 -3.428 4,395 21 0.476 0.064 -0.412
2003 4,939 322 6.519 4.197 -2.322 4,617 3 0.065 0.080 0.015
2004 5,189 347 6.687 4.905 -1.762 4,843 11 0.227 0.108 -0.119
2005 4,974 344 6.916 5.664 -1.252 4,630 6 0.130 0.140 0.010
Panel b. U.K. ordinary listings.
Listing stock
Listing flows
Year Firms Listed Actual % Expected
% Expected - Actual
Firms New
listings Actual %
Expected %
Expected - Actual
1990 – 2001 (average) 3,693 99 2.690 3,542 2 0.057
2002 4,494 99 2.201 2.253 0.052 4,396 1 0.023 0.021 -0.001
2003 4,708 91 1.933 2.572 0.639 4,618 1 0.022 0.033 0.011
2004 4,934 91 1.844 2.817 0.973 4,846 3 0.062 0.049 -0.013
2005 4,708 78 1.657 3.112 1.455 4,630 0 0.000 0.057 0.057
US
UK
Listing stock Listing flows
Comparing Cross-listing Premiums
-0.25
-0.15
-0.05
0.05
0.15
0.25
0.35
0.45
0.55
0.65
19
90
19
91
19
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02
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20
05
Rule 144a Level 1 OTC NYSE/Nasdaq
Average = 22%
Average = 12%Average = 5%
U.S. Cross-Listing Premium
-0.25
-0.15
-0.05
0.05
0.15
0.25
0.35
0.45
0.55
0.65
19
90
19
91
19
92
19
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19
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00
20
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02
20
03
20
04
20
05
AIM LSE DRs NYSE/Nasdaq
Average = -5%Average = 1%
U.K. Cross-Listing Premium
Key finding• No cross-listing premium has ever existed in U.K.
SOX and the US listing premium?
Cross-listing Premiums for U.S. Exchange and U.K. Ordinary Share Listings
-20%
-10%
0%
10%
20%
30%
40%
50%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Diff
eren
ce in
Tob
in's
q o
f C
ross
-list
ed a
nd N
on-C
ross
-Lis
ted
Firm
s as
% o
f T
obin
's q
of
Non
-Cro
ss-L
iste
d F
irms
US Exchange
UK Ordinary
?
?
?
The Third Question: The Future
• Where have we been?– Key trends in cross-listings around the world– Academic research: why do firms cross-list globally?
• Where are we now?– Recent developments in global competition– New controversies, new ideas, new evidence
• Where are we going?– How are regulatory authorities responding?– The potential risks and opportunities
The CCMR Responds
Original report Nov 4, 2006, revised Dec 4, 2007:• A second “wake-up call” for U.S. regulation• Broadened measures of global competitiveness• “We have basic concerns with the DKS findings” (p.31-32)
The SEC’s Policy Concessions
• In March 2005, the SEC extended deadline for non-US issuers using Form 20F on internal compliance controls of SOX to July 15, 2007 allowing companies to "use the extension not to delay, but to improve quality of their efforts.“
• On March 21, 2007, the SEC passed a new Rule 12h-6 (“Termination of a Foreign Private Issuer's Registration of a Class of Securities Under Section 12(g) and Duty to File Reports Under Section 15(d) of the Exchange Act of 1934”)– What happened? 59 companies deregistered within 6 months
• In 2007, SEC International Affairs proposed “blueprint” for mutual recognition of stock exchanges & brokers, so that no need to fully register with SEC; April 2, 2008 Sen. Jack Reed (D-R.I., Senate Banking) told SEC proposal is “bridge too far” and urged SEC to “go slowly”
The Treasury’s New Plan for the SEC
Muzzling the WatchdogNew York Times Op-Ed, April 29,
2008 by former SEC chairs William Donaldson, Arthur Levitt & David Ruder
• “We fear that the current conversation about the future of the SEC is getting ahead of itself.”
• “proposal envisions an SEC that practices ‘prudential’ regulation offering up principles and guidelines…turning the SEC from a market referee into an industry coach”
“..developments are pressuring the US regulatorystructure, exposing gaps and redundancies, and compelling market participants to do business in other jurisdictions.”
Future Opportunities and Risks• Is there a risk that current and proposed changes to the
regulatory structure in the U.S. drive away more prospective listings than they were designed to attract?
• If so, what will happen to the benefits (e.g. cross-listing premium) to existing international listings? Will terms under which U.S.-listed foreign firms raise capital deteriorate? Will more firms seek to delist and deregister as a result?
• If so, will there be any consequences to the value of listing for domestic firms?