Race to the Top Among Stock Exchanges: Theory and Evidence

Abstract

In recent years, stock exchanges have engaged in strategic alliances and regulatory changes to attract firms and trading volume. To characterize the outcomes of such regulatory competition, legal scholars coined the phrases race to the top and race to the bottom. In a race to the top, the competing exchanges adopt similar value-enhancing standards, while, in a race to the bottom, they enact weaker rules. We demonstrate that, for a battle for market share to result in a race to the top, it cannot have a winner. We identify a race to the top in Korea and show that, as our model predicts, it ended up with no winner.

Keywords: Race to the top, stock exchanges, emerging markets

JEL Classification: G15, G38