David's Dilemma: A Case Study of Securities Regulation in a Small Open Market

Abstract:     
This article tells the story of an Israeli regulatory program aimed at luring back home Israeli companies listed only on U.S. stock markets by facilitating dual listing of their stocks on the Tel Aviv Stock Exchange. It is the story of a David market up against a Goliath market. As in the Biblical story, David's dilemma is whether to challenge Goliath or yield to the giant. Unlike the Biblical story, however, the modern David does not end up with the upper hand but, rather, learns he must come to terms with Goliath. Beyond documenting a piece of Israeli political economy, this article provides several lessons of general relevance to small or emerging markets as well as to large ones. In this story, the regulator of the small market finds itself a regulatory price-taker. In a mirror image, the U.S. market emerges as a global regulatory price-setter. This regulatory externality, or regulatory arbitrage, is disturbing because the standard with which Israeli regulation had to align is the watered-down version for non-U.S. issuers. Indeed, any effort to require an iota of additional disclosure beyond the American foreign issuer regime has failed due to vehement objections from the Tel Aviv Stock Exchange and business interest groups. The role of the stock exchange as regulator and the interplay between corporate law and securities regulation are also discussed in this context. This article thus casts some doubt on the desirability of piggybacking on foreign markets. Sometimes, it turns out, piggybacking can be a ride to the bottom.

Number of Pages in PDF File: 38

JEL Classification: G15, G18, G3, G38, K22

working papers series