Editor’s Note: This post is by Howell Jackson of Harvard Law School.
A forthcoming issue of the Virginia Law & Business Review entitled “US Securities Regulation and Global Competition” will feature articles by Eric Pan and myself, Stavros Gadinis, and Andreas M. Fleckner on international aspects of United States securities regulation. The articles in this symposium issue have important implications for the ongoing debate over competition among markets internationally for issuers of securities as well as for the role played by US securities regulations in the apparently declining competitiveness of US capital markets. In an introduction to the issue, Donald Langevoort characterizes all three articles as exploring different aspects of the bind that U.S. securities regulation now faces in balancing demands for more intense supervisory oversight with pressures to improve U.S. capital market competitiveness in the face of mounting international competition.
In “Regulatory Competition in International Securities Markets: Evidence from Europe – Part II ,” Eric Pan and I return to the study of capital raising practices of foreign firms. We began this project nearly a decade ago at a time when U.S. corporate law scholars were debating the theoretical merits of a regime of “issuer choice” in which firms would be permitted to choose the legal regime governing the sale of and trading in issuer securities. Our goal was to move beyond theoretical debates by interviewing market professionals to ascertain exactly how firms were deciding in which markets to raise capital and to probe the extent to which mandatory legal regimes were constraining.
Our new article is the second half of this research project and draws on evidence gained from some four dozen in-depth interviews conducted in 1999 with lawyers and market professionals in London and other major European markets. The first article in the project, which is available here, presented evidence concerning capital raising practices within the European Union. The second article, which is now forthcoming in the Virginia Law & Business Review, focuses on practices of European issuers seeking to raise capital in the US. Our results are of particular relevance to recent debates over the effect of the Sarbanes-Oxley Act on foreign issuers as our survey took place shortly before that Act was passed. Significantly, our article provides evidence that during this earlier period US investors were tending to prefer to execute transactions on European trading markets as opposed to parallel markets established in the US, such as ADR listings. In other words, many aspects of the decline in U.S. capital markets competitiveness that some have associated with the enactment of the Sarbanes-Oxley Act were in evidence well before the passage of that Act.
In the article, Eric and I present a range of evidence on the capital raising choices available to European issuers seeking to raise capital in the US and how they weighed the pros and cons of these choices. We test our findings against statistical evidence and other academic writings on the subject and discuss the implications of this aspect of our analysis on the debate over regulatory competition. The article also presents survey data about the efficacy of SEC supervision of foreign issuers seeking access to public markets as well as information pertaining to legal fees and other direct expenses that European issuers incurred when they raised capital in the US in the late 1990s. While the additional costs and regulatory impediments of the public U.S. offering process imposed a burden on foreign issuers seeking access to U.S. public markets at the time, market developments, including the rise of European capital markets and the availability of alternative mechanisms to reach most U.S. investors, seem to have played a more important role in the declining relative attractiveness of U.S. public listings.
The paper by Stavros Gadinis, “Market Structure for Institutional Investors: Comparing the US and the EU Regimes,” considers the rules governing stock exchange market structure: Regulation NMS (“National Market System”) in the United States and the EU Directive on Markets in Financial Instruments (“MiFID”) in the EU. Focusing on issues of regulatory design, the article compares the US and EU regimes to explore which policy can better achieve its stated goals. In particular, the paper examines the impact of these policies on the major contributors to equity trading volume in the last decade: institutional investors. It argues that US rules result in higher liquidity costs for institutional investors and may harm the informational efficiency of US markets. The paper is available here.
In “FASB and IASB: Dependence Despite Independence,” Andreas M. Fleckner focuses on the organizational structure of the Financial Accounting Standards Board and the International Accounting Standards Board and their susceptibility to outside influence. The paper considers the integration of each Board into its respective parliamentary system as well as the exposure of each Board to financial, political and national influences. The paper shows that, in principle, both Boards are organized independently from private and governmental influence, but that neither Board is immune to outside influence. It refers to recent examples of both Boards being subjected to outside influence and, when put under pressure, making concessions that jeopardized their independence. The paper is available here.