Law: Plugging the IPO Drain

To hear New York City Mayor Michael Bloomberg, Senator Charles Schumer and a host of business luminaries tell it, the U.S. is losing its financial edge--and the law is largely to blame.

Stifling regulations, absurd lawsuits and ambitious prosecutors are pushing companies to raise money overseas, the scolds in pinstripes warn, and unless the rules loosen up, within a decade New York City could slip behind London, Hong Kong or, yes, Dubai as a center of global finance. President George W. Bush chimed in during a Jan. 31 speech, saying that lawsuits and overregulation might drag the markets down.

The statistics seem to support this bleak view. In 2001, 12 of the 20 biggest-dollar initial public offerings (IPOs) occurred in the U.S. In each of 2005 and 2006, only one did. IPOs totaled $55.2 billion in Britain last year and only $46.6 billion here. Since 2000, the number of foreign companies listed on NASDAQ fell 34%.

But the law should be the hero of this tale. U.S. stock markets still attract more money and investors than any in the world, mostly because of a reputation for operating fairly. The strict rules "give companies the opportunity to tell investors, 'Look at the scrutiny we undergo. That's why you should invest with us,'" says Andrew Karolyi, an Ohio State University finance professor.

Thanks in part to this reputation for clean dealing, foreign firms can get as much as 37% more for their stock on U.S. markets than they can elsewhere, including on the London Stock Exchange, according to an article co-authored by Karolyi. That's a big reason why, per dollar raised, U.S. stock offerings are the cheapest in the world.

O.K., but what about Sarbanes-Oxley, the 2002 law enacted to prevent Enron-style scandals? Among other burdens, it requires financial statements so squeaky clean that a company's chief executive and financial officers can vouch for their accuracy. Corporate executives estimate that the law has cost U.S. companies tens of billions of dollars in extra auditing fees and other expenses.

Yet the U.S. share of IPOs began falling six years before Sarbanes-Oxley even existed. In 1996 about 60% of all IPOs took place on Wall Street. By 2001, only 8% did. In fact, the U.S. share has on average increased since then, despite Sarbanes-Oxley, to about 15% in 2005. Charles Niemeier, a member of the U.S. Public Company Accounting Oversight Board, calls it "the clearest, most straightforward evidence" that Sarbanes-Oxley is not driving companies overseas.

Shareholder lawsuits are also blamed unfairly. Those suits typically accuse a company of securities fraud soon after its stock price plummets, and a 1995 federal law made them harder to pursue. After peaking in 1998, the number of such suits declined through last year. Bloomberg and Schumer have helpfully pointed out that settlements in shareholder suits have "skyrocketed" from $150 million in 1980 to $9.6 billion in 2005, which sounds impressive, except that most of the $9.6 billion came from the WorldCom settlement of $6.1 billion and nine other settlements of $100 million or more each.