Thursday, November 30, 2006

Costs and Benefits of Regulation

As part of a study on the impact of regulation on market, the Committee on Capital Markets Regulation provides the SEC with several sudies today that try to guage the costs and benefits of regulation.

Particularly interesting is Zingales' look at whether regulations following the Governance Crisis of 2002 had a detrimental impact on the relative advantages of a US listing.

From the WLS (via Pittsburgh Post Gazette) Is a U.S. listing worth the effort?:
"The premium for listing on both U.S. and foreign markets averaged 51 percentage points from 1997 to 2001. It dropped to 31 percentage points between 2002 and 2005, Mr. Zingales found.

'We raised the cost of being public in the U.S.,' said Glenn Hubbard, dean of the Columbia University business school and co-chairman of the capital-markets committee. 'These things have long-term consequences."
"Others aren't so sure. Andrei Shleifer, an economics professor at Harvard University, called the decline in the foreign-listing premium "fascinating" but whether it is due to "improvements in corporate governance and the quality of stock markets abroad, or from the reduced benefits of U.S. listing, is still an open question."

Another possibility is that rather than the costs rising, it could be that the percieved benefit of a US listing declined. This was not as a result of the regulations, but because the governance crisis (which brought about the regulations) demonstrated that US markets were not as minority investor friendly as might have been percieved prior to the problems. For instance, again in the WSJ/Post-Gazette piece:
"Andrew Karolyi, a finance professor at Ohio State University who has also studied the cross-listing premium said Mr. Zingales's conclusion is "reasonable," but advised caution. Mr. Karolyi said in his own research he had been unable to relate a change in the cross-listing premium to corporate governance."

Over at IdeaBlog Larry Ribstein does a GREAT job discussing both sides and concludes that
"if you raise the price of something without also raising the value, the demand will fall, and that applies to bonding. I hypothesize that SOX, by meddling in the internal governance as well as disclosures of foreign firms, raised price more than value. The result would be declining cross-listings in the U.S., a phenomenon we have observed."
The NY Times also has an article on the findings and the committee that is speaking to the SEC today about regulation. A look-in:
"The committee...said the S.E.C. should be required to perform cost-benefit analyses on all rules before they were adopted. It said the S.E.C. should also take steps to rein in private securities litigation and adopt policies to shield corporate directors and auditors from some lawsuits....The report also calls for relatively modest changes in the enforcement of the Sarbanes-Oxley Act and supports greater shareholder democracy by limiting antitakeover defenses of companies"
Interesting and important stuff!!

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