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Abstract:
Credit rating agencies (CRAs) play a vital role in enabling financial markets to operate efficiently by acting as informational intermediaries specializing in the appraisal of the creditworthiness of corporations that issue debt. Gradually, they have become central to the financial markets' infrastructure through their role in rectifying information asymmetries that exist between issuers and investors. Concurrently, CRAs have gained considerable clout over market participants, as their assessments of creditworthiness have come to be viewed as authoritative. Despite their importance, however, rating agencies remain unregulated private institutions.

The recent wave of corporate scandals has led many to call their contribution to market efficiency into question. In light of such criticism, studies conducted by lawmakers and regulators sought to further examine the role and effectiveness of CRAs. Although the studies revealed no particular wrongdoing on the part of CRAs, they warned of potential problems that could disrupt the smooth operation of capital markets. These problems relate to the reliability and integrity of ratings, as well as to possible anticompetitive practices on the part of CRAs. These potential problems are worrisome given that CRAs wield considerable power over issuers and investors through the information disseminated in their ratings.

Fundamentally, the main theme underlying the criticism of CRAs relates to their accountability towards market participants. In a perfectly functioning market, the fact that CRAs have such significant power would not elicit such concern since they would be accountable to both issuers and investors. The real world departs from this ideal and market failures may lead to a divergence between, on the one hand, the interests of CRAs, and, on the other hand, those of issuers and investors. Two market failures are noteworthy in this regard: imperfect competition and agency problems. A review of the legal and institutional environment surrounding CRAs indicates that there is a dearth of mechanisms designed to offset these markets failures and to ensure CRAs' accountability toward issuers and investors. In fact, it would appear that reputation is the primary, if not the only mechanism that acts to restrain opportunistic behaviour on the part of rating agencies. Thus, a potential accountability gap exists.

It is in this context that regulators have examined possible methods of enhancing the accountability of rating agencies. The International Organization of Securities Commission (IOSCO) published the Code of Conduct Fundamentals for Credit Rating Agencies aimed at ensuring the quality and integrity of ratings. The Securities and Exchange Commission (SEC) has proposed a rule that would define the conditions an entity must satisfy in order to obtain a Nationally Recognized Statistical Rating Organization designation. In light of the recent flurry of regulatory initiatives, the purpose of this study is to discuss the attitude that Canadian regulators should adopt in approaching CRA accountability. The study argues that the IOSCO Code is better suited to implementation in Canada than the SEC rule, which is idiosyncratic to the American system. The study proposes implementing the IOSCO Code through a disclosure strategy.

Credit rating agencies, securities regulation

Abstract:
The credit crisis that started in the American mortgage subprime market in 2007 is having profound social and economic consequences. In this context, lawmakers, regulators, and commentators have questioned the role of rating agencies in the market turmoil. In light of the critiques, a strong consensus emerged that regulatory intervention was needed. The consensus was encapsulated in the Group of Twenty (G20) communiqué of April 2009 that stated that 'We have agreed on more effective oversight of the activities of Credit Rating Agencies, as they are essential market participants.' Thus, a number of reform initiatives are under way in Canada, Europe and the United States to address the concerns raised by credit rating agencies’ activities in the context of structured finance products.

The paper provides a critical assessment of the regulatory initiatives put forward on both sides of the Atlantic to address the problems which have affected the accuracy of the ratings as well as the integrity of the ratings process. The first part of the paper offers some background relating to the subprime credit crisis. The second part moves to an analysis of the role of CRAs in the context of the structured finance products. Finally, after having highlighted the failings of CRAs’ in the asset-backed securities market, the paper presents the reform initiatives. It offers a critical comparative examination of the strategies for enhancing the accountability and effectiveness of CRAs.

credit ratings, rating agencies, structured finance, financial regulation

Abstract:
The theory of law and finance proposed by La Porta et al. (1998) predicts that minority controlled ownership structures, i.e. the structures that allow voting rights to exceed cash-flow rights, are more frequent in legal contexts where investors are not well protected against the expropriation attempts orchestrated by controlling shareholders. The purpose of our study is to test this prediction in a unique environment, that of the province of Quebec. Quebec's distinct status hinges on the fact that it is a Civil Law jurisdiction in a country, Canada, which is made up of nine other provinces with a Common Law tradition. Overall, the results support the theory. Quebec's Civil Law tradition appears to lead to a greater concentration of voting rights and a wider separation between voting rights and ownership rights.

Ownership structure, law and finance, private benefits of control

Abstract:
Small and medium-sized enterprises (SMEs) play a vital role in the Canadian economy. While the growth and success of these enterprises do not depend solely on financial support, access to financing is critical for their expansion. In this respect, public equity financing performs a crucial function among the various sources of capital in the funding of growing SMEs. From this perspective, the recent restructuring of Canadian stock exchanges which has lead to the creation of a junior stock exchange is commendable. Appropriately designed, a junior stock market can enhance the accessibility of public equity financing for SMEs by giving them access to a liquid secondary market. However, if it is to significantly improve the financing conditions of SMEs, the creation of a junior exchange must be accompanied by a revision of the current regulatory framework governing initial public offerings. As this paper shows, current securities regulation impacts on SMEs' ability to raise public equity capital. On the one hand, regulation enacts requirements which tend to burden excessively small issuers. On the other hand, it fails to correct market imperfections which raise the cost of capital for SMEs. In this context, this paper argues for reforms that will contribute to the implementation of a cost effective regulatory regime adapted to the needs and characteristics of smaller issuers.

Securities regulation

Abstract:
Stock exchanges are an important determinant of the competitiveness of Canadian capital markets. Regulators have recognized this fact when they have approved the consolidation of Canadian stock exchanges in 1999. The specialization of stock exchanges purported to enable them to cater more effectively to issuers and investors, and thereby to face the competition from foreign-based exchanges. Indeed, the competition has increased as foreign stock exchanges increasingly seek to attract listing from Canadian firms. In this respect, Canadian issuers' interest in listing on the Alternative Investment Market (AIM) of the London Stock Exchange (LSE) is a testament of this growing competition. Created in 1995 to allow companies to access public capital with a reduced regulatory burden, AIM has been extremely successful in attracting investors and issuers, including more recently a number of Canadian public companies. The attractiveness of AIM is intriguing for policymakers interested in the competitiveness of Canadian securities markets. Despite the interest generated by AIM, few studies have been devolved to this specialized stock exchange, either from an economic or regulatory perspective. And none of the existing studies has sought to analyze the relevance of the AIM model for Canadian stock exchanges, and, more broadly, the competitiveness of Canadian capital markets. From this perspective, the following analysis seeks to fill this research gap by providing a better understanding of AIM. Specifically, the objectives of this article are two-fold. First, this article examines the extent to which AIM has been successful with Canadian issuers. Second, it discusses whether the AIM model is informative for the regulatory approach followed by Canadian stock exchanges.

Stock exchanges, securities regulation

Abstract:
The significant role which small and medium-sized firms play in the economy depends to a great extent on their ability, once established, to grow. While the growth and success of these enterprises depends on various factors, access to appropriate financing is critical for their expansion. In this respect, it is widely recognized that public equity financing performs a crucial function among the various sources of capital in the funding of growing SMEs. Unfortunately, as many have noted, small and medium-sized enterprises seeking to tap public equity financing face significant hurdles that restrain the accessibility of this source of capital. Since the beginning of the last decade, information technology, especially the Internet, has been profoundly affecting financial markets. Although the influence of technological advance is far-reaching, one of the most interesting impacts of Internet technology is that it can offer new potential for smaller issuers to raise capital by enhancing the informational and operational efficiency of the market. However, recent trends in the use of technology in the primary market raise tensions with traditional securities law concepts. If they are to foster capital formation, securities regulators will need to be more sensitive to the regulatory challenges of this changing technological environment. In this respect, it will be argued that the regulatory regime can be adapted to respond to technological change without jeopardizing investor protection and market confidence.

Securities regulation

Abstract:
Corporate governance is increasingly attracting attention from Canadian governments and regulators. Although they have been numerous, the proposals put forward in Canada by corporate governance reform committees share two salient characteristics. First, they assume that reform of corporate decision-making of publicly held corporations is required in order to maximize social welfare. Second, they presuppose that the implementation of and compliance with the recommendations are private matters that should be left to the discretion of corporate actors. Corporate governance should be primarily regulated by private norms. The first characteristic has been extensively discussed. However, the second characteristic of reform initiatives has received less attention. This chapter makes a contribution towards bridging this gap in the current literature by discussing the role of public regulation in the implementation and enforcement of corporate governance reform proposals.

Corporate law, corporate governance

Abstract:
An income trust is an entity whose securities entitle the holder to the net cash flows generated by an underlying business or income-producing property owned by the trust or another entity. Income trusts are reportedly more tax efficient than common equity firms. Following what some observers referred to as a bubble or a "trust mania", on October 31st, 2006, the Canadian government amended the income tax law to reduce the trusts' tax efficiency. This article holds a post-postmortem on that policy decision by comparing income trusts and common equity firms from a legal, governance and financial performance point of view.

In this article, we first stress that several authors expressed concerns about the level of investors' protection and governance quality offered by the income trust structure. These concerns were especially acute in the case of business trusts. We then test the hypothesis as to whether the industry, size and risk-adjusted returns of the various types of income trusts are greater than for corporations to compensate for those concerns. We find that income trusts other than energy trusts and to a lesser extent real estate trusts did not enjoy higher returns than corporations of similar industry, size and risk. These results partially support the recent policy decision by the Canadian government to remove this tax incentive favouring the income trust structure over the common equity's.

Income trust, Trust, Governance, Performance