Financial reform and foreign stocks

Larry Ribstein —  20 May 2010

The WSJ reported on Tuesday that moves by Daimler and other European, especially German, companies to shed their U.S. listings indicate that many of these firms “have come to view [a U.S. listing] as a liability.” The exodus will leave just four major German companies with U.S. listings.

The WSJ notes that

the costs have come to outweigh the benefits for the majority of German corporations. Most of their international investors trade their shares through electronic trading platforms based in Frankfurt. The cachet of trading on a U.S. exchange has faded to some degree, with markets becoming more global and governance and listing standards rising on many overseas markets.

Meanwhile, the cost and complexity of adhering to U.S. regulations, such as the Sarbanes-Oxley Act, have risen. That has been shown especially in the cases of companies like Daimler and Siemens, which have found themselves in the crosshairs of Securities and Exchange Commission probes in recent years as a result of their U.S. listings. * * *

Gregory Jackson, a professor of management at the Free University in Berlin, says that since the 1990s, when many European companies first began listing in the U.S., European governments have caught up with corporate oversight and SEC-reporting status has become less important to institutional investors. “The prestige of the American model as good corporate governance has lost its status since Enron and the financial crisis,” he said.

This is consistent with my theory of cross-listing in Cross-Listing and Regulatory Competition. I noted evidence that firms that cross-listed in the U.S. sought to use strong U.S. securities laws to “bond” their promises to investors of honest behavior.  However, I also argued that there is a limit to this bonding theory:

If the law of the cross-listing country imposes legal costs in excess of bonding or signaling benefits, this may reduce cross-listings. The rate of decline may depend on competition in the market for cross-listings. To the extent that cross-listing is viewed as a bridge from concentrated-ownership to dispersed-ownership markets, the overall market for cross-listing can be expected to shrink over time as more markets make the transition, through cross-listing or otherwise, to the legal framework necessary to support dispersed ownership. In other words, the market for cross-listing may be self-eliminating in the long run. Moreover, as world securities markets develop, leading cross-listing jurisdictions such as the US are subject to more competition from other strong capital markets for the decreasing pool of customers. This means that they can no longer charge monopoly rents in the form of over-regulation. Cross-listing firms will be able to choose the jurisdiction that provides just the right level of bonding or that sends the right signal rather than having to choose between too much regulation and none at all.

In short, as the rest of the world catches up with U.S. governance and securities regulation standards, the U.S. can no longer hang onto to cross-listings if its politicians indulge in regulatory excesses.  SOX, of course, was the leading such excess.  Congress bulled ahead with SOX in 2002 taking no account of the high regulatory costs it imposed on firms from countries like Germany which were not organized along U.S. lines.  Patchwork S.E.C. exemptions could not solve the problem.

This story is worth considering on the cusp of the chaotic financial “reform” Congress is poised to enact.  The immediate effects will be muted by the facts that Europe is proceeding along the same lines, and the U.S. remains a beacon for firms from countries whose regulation hasn’t yet caught up.  But if the U.S. continues to regulate heedless of global competition the debt ultimately will come due.

Larry Ribstein


Professor of Law, University of Illinois College of Law