Identifying the Causes of Wall Street's Loss of Competitiveness

Something dramatic has changed to make U.S. capital markets less attractive to foreign and American companies, according to Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance. The shift seems to be due to improvements in other markets, a change in the U.S. regulatory environment, and an increase in the risk of litigation in the U.S.

As a member of the U.S. Committee on Capital Markets Regulation, Zingales studied seven possible factors affecting the decline in foreign-based companies conducting IPOs in the U.S. capital market. He shared his research at the first Global Financial Markets Forum on December 12 at Gleacher Center.

Among the factors he identified are the increasing availability of liquidity in other countries, a decline in visibility by listing in the U.S., the cost of bonding to improve compliance and transparency, better valuation elsewhere, higher listing costs, increased exposure to liability, and changes in the players in the world’s IPO market.

Zingales believes the committee should ask regulators to use data with economic reasoning before introducing legislation. He also said the U.S. market should significantly reduce control of capital so companies are not held captive, and that shareholders should be granted more rights such as those in the United Kingdom.

“At Chicago, looking at the data is very important,” he said. “We would like to see a similar approach to regulation as with tax cuts. Every time some regulation is considered, we would like to see an economic estimate of the cost and benefit of this regulation. Just as when they ask business leaders to provide economic reasons for introducing something, we want to ask them to provide economic reasons to regulate. I think that would be a much better state of affairs.”

Because Sarbanes-Oxley was passed in an “emotional moment,” there was no time to do research first, Zingales said. It is time for the federal government to create an agency to regularly evaluate the effects of such legislation, he said.

“This should not be done sporadically,” Zingales said. “Every three years, say, the cost and benefits of any regulation passed should be reviewed in an economic manner and discussed appropriately. This has not received a lot of attention from the press, but I think this is very important.”

Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange, said he is keenly aware of how government can hinder or destroy competition. When Melamed introduced futures at the CME in 1972, no agency existed to regulate the idea, he said. Four years later, the Commodities Futures Trading Commission was born and adopted a cumbersome policy that lasted 24 years before the commission reversed itself, said Melamed, who chaired the event.

“I testified before Congress,” Melamed said. “I told them, ‘We will not be able to justify pioneerism.’ The law passed was, ‘Before we launch a new market, we must have economic justification for it.’ You try that. You’ve got a new idea. It’s never been tested in the marketplace. Go get me economic justification, when, in fact, the only economic justification is the marketplace.”

—Phil Rockrohr