The Regulatory Consequences of the Oscillating Domains of Public and Private Markets

Abstract

We contribute to the debate on regulatory interventions to stimulate public markets, which has ensued against the background of a significant boom in private markets and a corresponding decline in the number of firms and the amount of capital raised in public markets in the US and Europe. We argue that regulators should maintain a steady hand in setting the rules for capital markets and refrain from interventions that seek to shift capital raising from private to public markets. Our research challenges

the popular view of a linear trend from one market to the other. We take a long-term perspective and examine historical developments more closely, arguing that the interaction between public and private markets is more complex. We claim that there is a dynamic divide between these markets and identify specific factors that determine the degree to which investors, capital, and companies gravitate more toward one market than the other. We show that these factors interact whereby the domains of public

and private markets oscillate over time. While these oscillations imply 'competition' between these markets, we unravel their complementarities, which also militate against a secular trend towards one market. Our theoretical and empirical findings indicate that regulators should not seek to shift the dynamic divide, because the medium-term success of such interventions is doubtful, and they are likely to initiate a cycle of endogenous rule-making.

Keywords: corporate finance, capital markets, public markets, private markets, private equity, securities regulation, financial regulation

JEL Classification: D53, G1, G3, K22