Capital Markets Regulation

Greg Ip, Kara Scannell, and Deborah Solomon of the Wall Street Journal look into claims that regulations such as Sarbanes-Oxley are reducing the competitiveness of U.S. financial markets. They find reasons to be skeptical:

In Call to Deregulate Business, a Global Twist, by Greg Ip, Kara Scannell, and Deborah Solomon, Wall Street Journal: Prominent figures in the U.S. are warning that the nation's financial markets have been handicapped by post-Enron regulatory overreach. Treasury Secretary Henry Paulson has made addressing the problem a signature political issue. A blue-ribbon committee chaired by former Bush economist Glenn Hubbard has echoed this sentiment, as does a report commissioned by Sen. Charles Schumer of New York and New York City Mayor Michael Bloomberg.

Their key evidence is data suggesting that U.S. stock markets are increasingly unattractive places for companies to list shares. ... Their solution: a lighter touch in regulating corporate behavior.

Yet this position, which has gone largely unchallenged, downplays a different explanation for why U.S. exchanges are under pressure -- the changing nature of global finance. Stock markets around the world have become better and deeper, encouraging companies to seek IPOs in their home market. Trading across borders has become simpler, cutting the prestige and usefulness of a big-country listing everywhere. ... Meanwhile, other countries are stiffening their own rules, bringing them closer to the U.S. model.

Andrew Karolyi, an Ohio State University economist who specializes in international stock-exchange listings, ... is skeptical of the stock-exchange evidence, which he links instead to transitory global trends. 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," Mr. Karolyi says. ...

But ... Mr. Hubbard's Committee on Capital Markets Regulation, consisting of academics and finance executives and endorsed by Mr. Paulson, spent 148 pages discussing the harm done by U.S. regulatory and legal risks. Among the charges: Suing corporations for fraud is too easy... Civil and criminal prosecutors are overzealous, producing civil enforcement penalties more than 100 times higher in the U.S. than the U.K. in 2004. Auditing standards are unreasonably onerous for small companies. ...

In an interview, Mr. Hubbard concedes there's "no smoking gun" that proves whether global or U.S.-specific forces are behind the smaller number of foreign companies listing in the U.S. "Both factors are important," he says. ...

There's little doubt U.S. exchanges are facing increasing competition. They're losing out to overseas exchanges for initial public offerings. Many overseas companies are deciding they don't need an American listing. And in the U.S. itself, many companies have decided they're better off private.

Taken alone, the cost of regulation can't explain what's happening to U.S. financial markets, and paring regulations might not alter the outcome, except to give a helping hand to Wall Street.

"Well-functioning capital markets are central to the success of the economy," says former Treasury Secretary Lawrence Summers, now a Harvard University economist and managing director at a hedge fund. "What fraction of capital markets transactions runs through New York is of much less broad-based significance."...