Are U.S. Capital Markets Losing Their Edge?
Over the past few decades the United States lost its international dominance in a number of manufacturing industries, including automobiles and consumer electronics, as other countries became more competitive in global markets. Recent evidence suggests that financial markets now are undergoing a similar trend: Just as Ford and General Motors have lost global market share to Toyota and Honda, U.S. stock and bond markets recently have seen their share of sales of newly issued corporate securities slip. By 2006 the London and Hong Kong stock exchanges each handled a larger share of initial public offerings (IPOs) of stock than did the New York Stock Exchange, which had been by far the dominant exchange in terms of IPO value just three years before. Likewise, the portion of new corporate bonds issued worldwide that are initially sold in U.S. capital markets has fallen below the share sold in European debt markets in each of the past two years.* Why do corporations that issue new securities to raise capital now conduct more of this business in financial markets in Europe and Asia? Among the factors contributing to this trend are quicker adoption of technological innovation by foreign financial markets, tighter immigration controls in the United States following the terrorist attacks in 2001, and perceptions that listing on American exchanges will expose foreign securities issuers to greater risks of lawsuits. Many people see burdensome financial regulation as the main cause, however, and point specifically to the Sarbanes Oxley Act of 2002. Congress passed this act after a number of accounting scandals involving U.S. corporations and the accounting firms that audited them came to light. Sarbanes Oxley aims to strengthen the integrity of the auditing process and the quality of information provided in corporate financial statements. The costs to corporations of complying with the new rules and procedures are high, especially for smaller firms, but largely avoidable if firms choose to issue their securities in financial markets outside the United States. For this reason, there is much support for revising Sarbanes Oxley to lessen its alleged harmful effects and induce more securities issuers back to United States financial markets. However, there is not conclusive evidence to support the view that Sarbanes Oxley is the main cause of the relative decline of U.S. financial markets and therefore in need of reform. Discussion of the relative decline of U.S. financial markets and debate about the factors that are contributing to it likely will continue. Chapter 7 provides more detail on the Sarbanes Oxley Act and its effects on the U.S. financial system.