Law: Plugging the IPO Drain

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So why the drop in IPOs and foreign-stock listings? As the Wall Street Journal and others have noted, a lot has to do with economic growth abroad. In 1980 the total value of shares listed in emerging markets like Brazil and India was 6.7% of the world total. By 2004, the figure was 12%. In 2005, Egypt, Kazakhstan and 27 other countries each held more than $1 billion worth of IPOs. Stock markets abroad are more sophisticated now and offer foreign companies the convenience of staying close to home.

As for London, its financial allure derives in part from light regulation, a convenient location between Asia and New York City and lower fees for underwriting stocks. Even so, the London Stock Exchange's Main Market has lost 23% of its foreign listings since 2000. London's rising status is due instead to the Alternative Investment Market (AIM), for which foreign listings increased from 31 in 2000 to 306 last year. The AIM's attractions are clear: even lighter regulation and low thresholds for company size and operating history. Many AIM-listed companies are just too small or financially unqualified to get on a U.S. exchange.

London's experience suggests that we could lure more companies to U.S. markets by loosening the rules on accounting and shareholder rights. But doing so might endanger the markets' reputation for fairness--and the enormous financial benefits that come with it.

Which is not to say that our laws couldn't be improved. We should probably ease the penalties for foreign firms that make inadvertent mistakes squaring their financial statements with American accounting rules. Or clarify a legal system that allows companies to be pursued by an army of SEC regulators, litigious shareholders, Justice Department prosecutors and state attorneys general. But the best strategy may be just to sit tight for a while, because using the law to keep the financial world honest isn't just the right thing to do; it's also good business.