We take a temporary breather from our discussion of the role of the SEC in the corporate governance process. 

We have not yet had a chance to explore in any great detail a variety of international governance matters, including the growing acceptance of portions of SOX in international markets. As a result, we are pleased to have an opportunity to review a recent paper, “ Has New York become less competitive in global markets? Evaluating foreign listing choices over time,” by Craig Doidge, University of Toronto, G. Andrew Karolyi and René M. Stulz, both at The Ohio State University.

The paper examines the so called loss of listings from the stock exchanges in the US since the adoption of SOX. The paper describes exchanges as a “unique bundle of attributes.” With respect to the United States, SOX (and the post-SOX reforms implemented by the exchanges) has altered this unique bundle. The question is how these changes have altered the competitiveness of US exchanges.

In the period from 1998 to 2005, the number of cross listed companies in the US increased relative to the London Stock Exchange’s Main Market. When the listings from the Alternative Investment Market (AIM) are included, however, London does better. The “typical” companies on AIM, however, are small firms “that would not have listed on a U.S. Exchange, either in the 1990s or in more recent years.”  What does it take to list on AIM?  As the report notes:

• “It is well-known that listing requirements on AIM are minimal – there is no prior trading requirement, prior shareholder approval for transactions is not required, admission documents are not pre-vetted by the exchange or by the UKLA, there is no minimum market capitalization, and there is no minimum public float requirement. In fact, all that is required for a firm to be admitted is that it has the support of a nominated advisor (“Nomad”) and subsequently the firm has to satisfy only the exchange’s weak disclosure duty.”

In addition, the paper concludes that the US has maintained its listing premium in the SOX era (the increases share value that results from listing in the home market and in the United States).  “Not only is this premium significantly positive every year, but there is no convincing evidence in our data that it has fallen in recent years.” London by comparison has no listing premium. In other words, “firms that list in London do so for reasons other than for a governance benefit.”

Said another way, companies come to the United States because of the higher governance standards (including those imposed by SOX) and the resulting premium in their share prices.  As a result, the US has remained attractive to foreign listings and retained its cross listing premium.   And, guess what?  As AIM experiences the consequences of listing high risk smaller companies (problems of fraud, for example), it is responding by imposing a higher degree of regulation.