The Wall Street Journal throws a pair of darts at the naysayers (including your author) who decry the present regulatory environment as overly burdensome and therefore detrimental to capital markets in the United States. Head to the New York Times, however, and we discover that the markets might be "too efficient." The first Journal article is a piece on the rise in monies raised by foreign companies on U.S. Capital Markets. Sayeth the Journal:
In the two years since stricter financial-control rules took effect in the U.S., an unexpected trend has occurred: The amount of money raised by foreign companies on American exchanges has grown.
So far in 2006, non-U.S. companies have sold $5.8 billion in stock through U.S.-listed IPOs, the highest year-to-date volume since the tech-stock boom in 2000 saw $27.2 billion of IPO listings emerge from overseas, according to data from Dealogic.
Though the number of companies tapping American exchanges for their new listings isn't up -- Dealogic shows there have been 17 this year, compared with 20 in 2005 -- the amount of money raised has nearly doubled in that time. Bigger deals, including Canadian doughnut chain Tim Hortons Inc.'s $772.5 million offering in March and German semiconductor firm Qimonda AG's $546 million debut earlier this month, helped create the higher volume.
To its credit, the Journal goes to pains to point out that the comparisons don't necessarily explain away the SarOx pain, but the lingering questions remain.
Bolstering this piece is an editorial page entry from the CEO of an offshore provider. He cites some reasons for the superiority of the NYSE as a capital market nexus:
Credibility: Meeting the financial reporting, corporate governance and disclosure requirements necessary for listing on the NYSE builds confidence among clients, the government and other regulators. Clients prefer reporting in U.S. Generally Accepted Accounting Principles, or GAAP -- the same high standards they set for themselves.
Global visibility: The prestige of an NYSE listing not only builds brand recognition among U.S. clients and potential clients, but also among international audiences, who recognize the high standards that must be met. The enhanced visibility associated with becoming a U.S.-listed public company translates directly into new business opportunities
Shareholder value: Companies that list in the U.S. have a valuation nearly one-third higher than those listed elsewhere, according to a study co-authored by professors Andrew Karolyi and Rene Stulz of Ohio State University and Craig Doidge of the University of Toronto. Companies that cross-list in the U.S. have a valuation 13.9% higher. This is attributed to the greater visibility, as well as the improved disclosure and transparency, of a U.S. listing.
Liquidity: A U.S. listing allows us to reach a wider pool of investors and to trade in scale. This, in turn, helps drive value for shareholders.
Part of me wonders if there aren't some perceptual issues at work here. Specifically, if foreign firms, particularly those, like WNS Global Services, from whence the CEO author of the Journal piece hails, see greater returns from the credibility boost (the "credibility margin" perhaps?) that an NYSE listing (or any U.S. listing) gives them relative to the expenses they will incur. For these firms the additional reputation and the additional capital available, which might not be should they not list in in the United States, might outweigh the costs of SarOx compliance, among other issues (the highly litigious environment in the United States, for instance). Access to key clients in one of the largest outsourcing markets might also be a factor for the likes of WNS that doesn't apply to firms in other industries.
This, in turn, causes me to wonder if there isn't some private equity opportunity here. After several years as a NYSE listed firm, and therefore several years of history in a highly regulated environment, is the credibility margin worth the yearly audit cost anymore? Surely a firm with such history won't suddenly lose its reputation if it goes private or moves offshore? I suspect mid and large cap LBO firms might consider stalking foreign firms from countries with local exchanges of ill repute that have been public in the United States for 2-3 years already. If the theory holds, this should be right about the time when the costs start to hurt more than they are worth.
I haven't heard much on some of the other theories forwarded by various pundits (Daniel Gross comes to mind) on subjects as varied as "The United States sucks at doing IPOs now." Have any Going Private readers come across any data, of the sort that I asked after earlier this month, that gives us a read on the import of underwriter reputation in IPO pricing accuracy?
Shifting to the New York Times, we get a later entrant into the world of insider trading as covered by, among others, the nicely face-lifted DealBreaker this month. The Times, pointed to as usual by the wonderful DealBook, is shocked, shocked, I tell you (circumvent registration via bugmenot), to discover insider trading is going on in here. That piece contains an absolutely yummy graphic and this choice quote:
"Martha Stewart got hurt very badly for something that happens every single day on Wall Street,” said Herbert A. Denton, president of Providence Capital, a money manager and an adviser to minority shareholders. “It’s a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the S.E.C. should get very, very serious and prosecute a lot of people or forget about it.”
Hard not to agree, really. Or has insider trading law become a tool of political advancement? (Not that I'm a Martha fan. That woman makes my scalp itch).
Maybe this explains the sudden splurge in foreign listings: the management of foreign firms just finds it easier to trade on their insider information in the United States. Lots more liquidity to hide in, after all. How are you supposed to bet the farm on the earnings announcement you authored if the daily share volume is only 4600 shares on the Bombay Stock Exchange?
I wouldn't be the first one to call for the legalization of insider trading, which, by the way, the Capital Markets seemed to tolerate just fine until the mid 1960s or so when it was finally outlawed. Professor Manne, for example, makes some pretty interesting arguments on the matter. Definitely worth the read.
An argument that I don't often see articulated is that the "little guy," i.e. the "casual" or "hobby" investor, shouldn't be in the market in the first place and the use of insider trading law to present the appearance of a level playing field, which clearly the public equity markets are not, and thereby pull in the unwary is tantamount to fraud itself.
Of course, I am speaking against interest here. If there weren't the greater fools of the small guys in the public equity markets, who would we pass off LIPO suction deals on?
