Light touch regulation does not work

Posted on

Fascinating article in the FT the other day by Adolf A. Berle professor of law at Columbia University Law School . He said:

Conventional wisdom holds that the London Stock Exchange is winning the international battle for listings and offerings, in large measure because of the "regulation-lite" policies of the UK's Financial Services Agency.

But, as it then showed:

A growing body of economic research shows the cost of equity capital varies with the regulatory and disclosure environment. In particular, these studies show that when a foreign company cross-lists on a big US exchange it incurs a significant reduction in its cost of capital and also displays a valuation premium (often 30 per cent or more) over non cross-listed companies from its home country. This pattern has continued for nearly 20 years, varying only in degree. Conversely, when a foreign company cross-lists on the London Stock Exchange, no valuation premium results and there is no reduction in its cost of capital. This pattern has also persisted since at least 1990.

Given that one reason for listing is to reduce your cost of capital this is extraordinary. As the FT notes:

The most plausible explanation is that stricter enforcement in the US causes investors to view the cross-listed company's financial results and projections with greater trust and confidence and assign a higher valuation. Put simply, deterrence works.

I buy that.

The implication is clear as a result: the days of London's tax haven inspired light touch regulation should be numbered. They do not provide economic benefit. And in this particular case, that's a pretty significant argument.

PS How do we know that London has a 'light touch'. As the FT notes:

Over recent years, the FSA has allocated between 8 and 12 per cent of its budget to enforcement, while the US allocates about 40 per cent and Australia around 45 per cent.

I called that damning evidence of neglect.


Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:

You can subscribe to this blog's daily email here.

And if you would like to support this blog you can, here: