Why the World No Longer Puts its Stock in Us

Abstract:     
Fewer foreign companies are offering their equities securities in the United States, indicating that the United States is losing its position as the global leader in capital formation. This essay analyzes the reason for this change in capital raising behavior and argues that this trend can not be explained sufficiently by the Sarbanes-Oxley Act or securities class action litigation. Instead, foreign companies - and to a greater extent US companies - are raising capital away from the United States because of more liquid foreign markets, more robust securities regulation in certain foreign markets, better trading opportunities on foreign exchanges, and a greater willingness by US investors to seek out investment opportunities in foreign markets. An examination of the rising number of Rule 144A/Regulation S offerings, the shrinking percentage of foreign company shares held as American Depositary Receipts and the growing amount of foreign equity securities owned by US investors provides evidence that the movement of foreign companies away from the US equity markets began in the early-1990s.

US regulators should acknowledge that the United States is no longer a unique market and respond to this trend in two ways. First, US regulators should open the US markets to greater foreign competition by removing barriers that prevent foreign financial service providers, especially stock exchanges, from doing business with US investors. Second, US regulators should devote more resources to raising the regulatory standards of foreign markets to ensure US investors receive suitable protection when they invest abroad. To accomplish this second goal, US regulators must seek stronger cooperative links with foreign regulators and move to a mutual recognition regime to induce foreign regulators to adopt standards more in line with US practice.

Keywords: cross-listing, depositary receipts, securities regulation, stock exchanges, mutual recognition, Sarbanes-Oxley

Working Paper Series