Sarbanes-Oxley and the Competitive Position of U.S. Stock Markets

Prepared for Members and Committees of Congress

Congress passed the Sarbanes-Oxley Act of 2002 (P.L. 107-204) to remedy weaknesses in
accounting and corporate governance exposed by massive fraud at Enron Corp. and other firms.
Criticism of the law, which has been fairly widespread among business groups, academics, and
accountants, focuses on the costs of compliance, which are said to outweigh the benefits. Several
studies and comments have argued that the rising cost of regulation has created incentives for
firms to list their shares on foreign markets or to withdraw from the public markets altogether,
weakening the international competitive position of U.S. stock exchanges.
Specific evidence cited includes the fact that 24 of the largest 25 initial public stock offerings
(IPOs) in 2005 took place on foreign exchanges, and that there has been a boom in the private
equity market, where U.S. securities regulation is minimal. This report attempts to put instances
like these in context by presenting comparative data on the world’s major stock markets over the
past decade.
In terms of the number of corporations listing their shares, several foreign markets have shown
faster growth than the major U.S. exchanges (the New York Stock Exchange (NYSE) and
Nasdaq). However, these increases appear to be fueled primarily by growth in the number of
domestic firms listing on their own national markets. While major foreign markets have seen
significant declines in foreign listings as a percentage of all listings, U.S. exchanges have not
been abandoned by foreign companies in significant numbers.
Perhaps the most common reason for firms to delist, or leave a stock exchange, is a merger with
another firm. Lower costs of regulation may be a side benefit of many mergers, but trends in
interest rates and stock prices appear to be the primary determinants of merger activity. A rising
number of corporate acquisitions result in the acquired firms “going private”—becoming exempt
from most regulation—but this trend is also largely driven by economic conditions. Private equity
investment has boomed since 2000 because debt financing has been abundant and relatively
cheap, and because institutional investors have sought higher yields than what the stock and bond
markets have provided.
Figures on new issues of stock (including IPOs) are volatile, and annual data may be skewed by a
few large deals. Certain foreign exchanges have recovered more quickly from the 2000-2002 bear
market, but, on the whole, there is little evidence that the U.S. stock market is becoming less
attractive to companies seeking to raise capital. When the bond markets are included, the role of
the U.S. securities industry in capital formation appears to be as strong as ever.
The data surveyed here suggest that rising regulatory costs have not precipitated any crisis in U.S.
markets, and that the outcome of global competition among stock exchanges depends more on
fundamental market conditions than on differentials in regulatory costs. This report will be
updated if events warrant.

Introduc tion ..................................................................................................................................... 1
Who Are the Competitors?..............................................................................................................2
Trends in Exchange Listings...........................................................................................................4
Foreign vs. Domestic Listings...................................................................................................6
New Listings.............................................................................................................................8
Delisti ngs ................................................................................................................................ 10
Mergers, Leveraged Buyouts, Going Private, Going Dark................................................11
IPOs and Capital Formation..........................................................................................................14
Conclusion ..................................................................................................................................... 19
Figure 1. Shares of Global Market Capitalization: September 2006...............................................4
Figure 2. Percentage Change Since 1995 in Listings......................................................................6
Figure 3. Foreign Listings as a Percentage of Total: 1995, 2002, September 2006........................7
Figure 4. U.S. Corporate Underwriting, 1995-October 2006........................................................19
Table 1. Market Capitalization of Domestic Shares: September 2006............................................3
Table 2. Number of Companies (Domestic and Foreign) Listed on Seven Major
Exchanges: 1995—September 2006............................................................................................5
Table 3. New Exchange Listings (Total, Domestic, and Foreign Companies): 1995-2005.............9
Table 4. Delistings on Selected Exchanges, 1995-2005................................................................10
Table 5. Completed Mergers and Acquisitions, 1996-2005...........................................................11
Table 6. Leveraged Buyouts, 1996-2005.......................................................................................12
Table 7. The Largest Global IPOs in 2005....................................................................................15
Table 8. Value of Equity Offerings on Selected Stock Exchanges, 1996-2005.............................18
Author Contact Information..........................................................................................................21

The Sarbanes-Oxley Act of 2002 (P.L. 107-204) was enacted in response to massive accounting
fraud at Enron and a long list of other U.S. corporations. The law sought to improve—or
restore—the effectiveness of the gatekeepers who are supposed to ensure that investors receive
accurate information about firms whose securities are traded in public markets. Under Sarbanes-
Oxley, corporate executives, directors, auditors, accountants, attorneys, and regulators are all held
to more stringent standards of accountability.
Criticism of Sarbanes-Oxley has focused on compliance costs, which to some observers outweigh 1
the benefits of improved governance and regulation. Since direct measurement of those costs and
benefits within a single business is impossible, much of the debate has looked to the securities
markets, where excessive regulatory costs should be mirrored.
Raising the costs of complying with U.S. securities regulation, as Sarbanes-Oxley unquestionably
did, creates incentives both for firms whose securities are listed on U.S. stock markets and for 2
firms weighing the costs and benefits of going public and obtaining such listings. Firms in the
first group (including non-U.S. companies) that find compliance costs excessive may choose to
delist their shares and become privately held businesses, or list on foreign stock exchanges, where
Securities and Exchange Commission (SEC) regulations do not apply. Firms in the second group
may decide to avoid SEC regulation by remaining private and seeking funds outside the public
securities markets, from private equity investors, for example. They also have the option of going
public in a foreign country. If significant numbers of firms have decided since 2002 that the costs
of U.S. regulation exceed the benefits of access to U.S. public securities markets (with their
traditional advantages of deep liquidity and low transaction costs), some or all of the following
would be expected:
• a decrease in the number of firms (domestic and foreign) whose shares are listed
on U.S. exchanges, either in absolute terms or relative to foreign stock
• an upward trend in delistings, reflecting companies that choose to leave the U.S.
public markets; and
• a falling off in the number of new listings on U.S. exchanges, as the initial public
offering (IPO) market shrinks or moves offshore.
Several recent comments and studies have cited evidence that U.S. stock markets have indeed 3
become less competitive and have suggested that expensive regulation may be partly to blame.
Few would argue that Sarbanes-Oxley (or U.S. regulation in general) is solely responsible for the

1 For an overview of criticisms, see Henry N. Butler and Larry E. Ribstein, “The Sarbanes-Oxley Debacle: How to Fix
It and What We’ve Learned,” Mar. 13, 2006, available at,eventID.1273/
2 Throughout this report,public is used to describe companies that sell their securities to the general public (and
thereby come under SEC regulation) and the markets where those securities are traded. “Private (or privately held”),
on the other hand, refers to corporations that do not report to the SEC because their stock is not available for sale to
small investors.
3 See, e.g., Committee on Capital Markets Regulation, Interim Report, Nov. 30, 2006, at
research.html, which argues that “the growth of U.S. regulatory and compliance costs compared to other developed and
respected market centers” is “certainly one important factor” in the loss of U.S. competitiveness, (p. x).

perceived decline in U.S. markets’ competitive position. Other factors include several long-term
trends, such as (1) the growth of foreign stock markets, particularly in countries like China and
Germany without long traditions of widespread stock ownership; (2) the lowering of legal and
regulatory barriers to cross-border investment and trading; and (3) the role of computer
technology in reducing communications, information, and transactions costs. However, policy
recommendations to address the perceived decline in competitiveness tend to focus on regulatory
relief, since there is little Congress or regulators can realistically do to reverse financial
globalization or technological progress.
Two facts often put forward are that in 2005, only one of the 25 largest IPOs took place in the
United States, and that going-private transactions have reached extremely high levels, both in 4
number and value of deals. In late 2006, Senator Charles Schumer and New York Mayor Michael
Bloomberg argued that “while New York remains the dominant global-exchange center, we have 5
been losing ground as the leader in capital formation.”
This report attempts to provide a context for evaluating arguments about the competitive position
of U.S. stock markets. The tables and charts below present data that illustrate trends in global
markets since 1995. The first set of data gives a sense of how the world’s stock exchanges rank in
size—in other words, where the competition lies. Subsequent tables set out data on new listings
and delistings at the major exchanges, and on trends in international listings. Finally, the record in
capital formation is examined: how much have firms raised on the major exchanges through
IPOs, through follow-up stock offerings. Some data ongoing-private transactions are also

The World Federation of Exchanges compiles statistics from 51 stock exchanges around the
world. At the end of September 2006, the market value of shares listed on these exchanges was
about $45.6 trillion, but this was not evenly distributed. There was a top tier of six exchanges, 6
each with more than $3 trillion in market capitalization. Two of these were American (the New
York Stock Exchange (NYSE) and Nasdaq), two Japanese (the Tokyo and Osaka Stock 7
Exchanges), and two European (the London Stock Exchange and Euronext). These six accounted
for $31.3 trillion in market capitalization, or 70.9% of the total.
There is a second tier of exchanges whose market capitalization fell between $1 trillion and $2
trillion: the Toronto Stock Exchange, the Deutsche Börse, the Hong Kong Exchanges, the BME
Spanish Exchanges, and the Swiss Exchange. These five markets combined accounted for $6.7
trillion in market capitalization, nearly the same as the remaining 40 exchanges, which added
$6.6 trillion, or 14.4% of the total. Table 1 and Figure 1 set out these figures.

4 Remarks by Treasury Secretary Henry M. Paulson on the Competitiveness of U.S. Capital Markets to the Economic
Club of New York, Nov. 20, 2006, available online at
5 Charles E. Schumer and Michael R. Bloomberg,To Save New York, Learn From London,” Wall Street Journal, Nov
1, 2006, p. A18.
6 The market capitalization figures cover domestic companies only, because inclusion of foreign listings would cause
double counting.
7 Euronext was formed in 2000 by a merger of the Paris, Brussels, and Amsterdam markets, and absorbed the Lisbon
stock exchange in 2002.

All 51 markets are competitors, but when we think of global competition as framed by Senator
Schumer and Mayor Bloomberg—a struggle to become (or remain) the world’s financial
capital—it makes sense to focus on the top tier, without ignoring the possibility that the second
tier markets may rise to the level of global competitors, either through growth of the domestic
corporate sector, merger with other exchanges, or cost-saving innovation. Indirect evidence for
this assumption is provided by the recent behavior of the NYSE and Nasdaq, which have
responded to competitive pressures by pursuing mergers with Euronext and the London Stock
Exchange, respectively. This report will present data on the top tier markets, and on the second
tier where it seems appropriate.
Table 1. Market Capitalization of Domestic Shares: September 2006
Market Percent of
Exchange Capitalization Total
($ in trillions)
New York Stock Exchange 14.37 31.55
Tokyo Stock Exchange 4.42 9.70
Nasdaq 3.67 8.06
London Stock Exchange 3.44 7.55
Euronext 3.36 7.38
Osaka Stock Exchange 3.04 6.67
Subtotal 32.30 70.91
Toronto Stock Exchange 1.64 3.60
Deutsche Börse 1.43 3.14
Hong Kong Exchanges 1.36 2.99
BME Spanish Exchanges 1.15 2.52
Swiss Exchange 1.11 2.44
Subtotal 38.99 85.60
World Total 45.55 100.00
Source: World Federation of Exchanges.

Figure 1. Shares of Global Market Capitalization: September 2006
Source: World Federation of Exchanges.

When a corporation wishes to have its shares traded on an exchange, it applies to be listed.
Exchange listing standards are not uniform, but generally include requirements regarding
corporate governance practices, financial size or condition, number of shares available for
trading, and minimum share price. In addition, listing on an exchange brings a company under the 8
jurisdiction of the national securities regulator. Other things being equal, therefore, an
exceptionally onerous regulatory regime ought to discourage growth in the number of listings.
Table 2 presents figures on total exchange listings—both domestic and foreign companies—from
the end of 1995 through September 2006, for the largest stock markets. Figure 2 rebases the same
data as an index (the number of listings at the end of 1995 is set at 100), and shows the
percentage change in the number of listed firms over the period. (Euronext is excluded from the 9
chart, since it was formed by merger in 2000: Hong Kong is substituted.)
A glance at Figure 2 suggests that the major U.S. markets have not fared well over the last
decade. NYSE listings have barely risen, while Nasdaq listings have fallen sharply. However,
factors other than international competition may explain this. The fall in Nasdaq listings reflects
the end of the “dot-com” bubble, when thousands of listed firms that had never made money (and
that in retrospect probably never should have gone public) collapsed.

8 For foreign firms, the full range of regulation does not necessarily apply: foreign companies listing on U.S.
exchanges, for example, are subject to more stringent reporting requirements when they are raising capital in U.S.
markets (i.e., selling new securities to U.S. investors) than if they are simply seeking a venue for secondary trading of
shares issued elsewhere.
9 For other second tier exchanges, consistent data is also a problem: the Canadian, Spanish, and German markets all
underwent mergers since 1995.

In the case of the NYSE, the stability of the listings figure before and after the bust makes it
difficult to argue that any single factor, including the response to the Enron scandals, had a major
impact. NYSE’s listing policy appears to focus on quality rather than quantity—the exchange’s
annual financial statement for 2005 describes NYSE listing standards as “the most stringent of
any securities marketplace in the world,” and notes that “[a]ll standards are periodically reviewed
to ensure that the NYSE attracts and retains the strongest companies with sustainable business 10
models.” In other words, the NYSE may not see growth in the number of listings as a goal to be
pursued for its own sake.
Table 2. Number of Companies (Domestic and Foreign) Listed on Seven Major
Exchanges: 1995—September 2006
Market 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
NYSE 2242 2476 2626 2670 3025 2468 2400 2366 2308 2293 2270 2257
Tokyo 1,791 1,833 1,865 1,890 1,935 2,096 2,141 2,153 2,206 2,306 2,351 2368
Nasdaq 5,127 5,556 5,487 5,068 4,829 4,734 4,063 3,649 3,294 3,229 3,164 3130
London 2,502 2,623 2,513 2,423 2,274 2,374 2,332 2,824 2,692 2,837 3,091 3212
Euronext NA NA NA NA NA 1216 1195 1114 1392 1333 1259 1,210
Osaka 1,222 1,256 1,275 1,272 1,281 1,310 1,335 1,312 1,140 1,090 1,064 1070
Hong Kong 542 583 658 680 708 790 867 978 1,037 1,096 1,135 1152
Source: World Federation of Exchanges.

10 NYSE Group, Inc., 2005 10-K Report, p. 8.

Figure 2. Percentage Change Since 1995 in Listings
Source: World Federation of Exchanges.
What of the markets where listings have increased during the past four years? Has their growth
come at the expense of U.S. exchanges, or was it driven by events in those exchanges’ home
markets? The next set of figures breaks down listings on the leading exchanges into foreign and
domestic companies.
International crosslisting is a fairly recent phenomenon. Until the late 1980s, only a handful of
stocks traded on exchanges in more than one country. In September 2006, by contrast, the
tabulation of the World Federation of Exchanges showed that of 40,888 total listings on global 11
exchanges, 2,738 represented foreign companies. Companies seek foreign listings for two
reasons: better access to foreign capital markets and to seek a more liquid secondary (or resale) 12
market for their shares, which aids capital formation in their home market. Exchanges seek
foreign listings as a source of fee income and for the prestige of being an international financial
Competition for foreign listings is intense, and cost-driven.13 How do the NYSE and Nasdaq
compare to other major exchanges? Figure 3 shows the percentage of total listings on the major

11 See the monthly statistics archive at Note that because a single company may be
listed on multiple exchanges, the 2,738 listings represent a smaller number of crosslisting firms.
12 Other things equal, investors will pay a premium for securities that can be resold quickly and inexpensively.
13 For example, the NYSE has proposed to eliminate listing fees for companies transferring from other markets. See

exchanges accounted for by foreign companies, at the end of 1995 (the earliest point in the World
Federation of Exchanges data series), at the end of 2002 (shortly after the enactment of Sarbanes-
Oxley), and at the end of September 2006.
Several features of Figure 3 are striking. First, international cross-listing is much more common
in Europe than elsewhere, as might be expected given the historical economic interdependence of 14
European states, and after more than a decade of economic integration policies. In the Asian
markets, on the other hand, nearly all listings are domestic. The trend over time is also
interesting: in every market other than the U.S. exchanges, the percentage of foreign listings has 15
fallen since 1995. The decline is most pronounced in the U.K. and German markets, where the
percentage of foreign listings was well above U.S. levels in 1995, but is now very similar. On the
NYSE and Nasdaq, the percentage of foreign listings climbed between 1995 and 2002, and has
since held steady.
Figure 3. Foreign Listings as a Percentage of Total: 1995, 2002, September 2006
Source: World Federation of Exchanges.
The data in Figure 3 do not provide clear support for a claim that regulatory costs have driven
foreign firms away from U.S. stock markets. One might argue that the percentage of foreign
listings on Nasdaq and NYSE would have continued their upward trend had U.S. regulation not
been tightened in 2002, but is that likely, given that foreign listings appear to be in decline on
major markets around the world? A more natural inference from the data would be that Nasdaq

NYSE Group, Inc., “NYSE to Eliminate Listing Fee Applicable to Issuers Transferring from Other Markets, Press
Release, Nov. 29, 2006.
14 Euronext and the BME Spanish exchanges are excluded because consistent and comparable data are not available
over the period. The September 2006 percentage of foreign listings on Euronext is 21.2%, but the meaning of
domestic is not plain where several national exchanges have consolidated.
15 Actually, the percentage of foreign listings in Osaka rose, but only from zero to 0.1%.

and NYSE have remained competitive, since U.S. exchanges have retained foreign listings since

2002, while other markets have been losing them.

With the data in Figure 3 in mind, we might suppose that in the markets (shown in Figure 2)
where total listings have risen faster than in the United States—Hong Kong, London, and
Tokyo—growth was driven by new listings of domestic companies. In Table 3, which breaks out
new foreign and domestic listings on the six largest markets, we can observe this process directly.
The data in Table 3 show one common feature: a dropoff in new listings after the peak of the bull
market of the 1990s. In five of the six markets, there were fewer new listings in 2001 than in
2000. (The exception was the NYSE, where the decline began earlier and 2000 was the trough
year.) This is the predictable result of a global bear market—trends and levels of stock prices
affect the prices investors are willing to pay for new shares.
The decline in new listings is most dramatic on the Nasdaq and Euronext markets, probably 16
because more highly speculative business ventures were taken public there than elsewhere.
There is no consistent pattern among the markets in the recovery from the crash.
Over the 11-year period shown in Table 3, London and Nasdaq are the clear leaders in the
number of new listings, and particularly in domestic listings. Since the crash, however, the two
markets have fared differently: London recorded record numbers during 2004 and 2005, while
Nasdaq remains well below the peak levels of the late 1990s.
Both U.S. markets registered sharp drops in new listings during 2003, the year after Sarbanes-
Oxley was enacted, despite the fact that stock prices (as measured by the S&P 500) rose 26%
during that year. “Regulatory shock” might explain some of this, or it may be that firms took a
wait-and-see attitude as to whether the recovery in stock prices from the trough in October 2002
would last. According to Nasdaq’s 2005 Annual Report, “the fluctuation in the number of U.S.
IPOs on The Nasdaq Stock Market from 2003 to 2005 was primarily due to market conditions.
Over the past few years, competition for new listings has come primarily from the NYSE, 17
although there is also strong international competition.” In 2004 and 2005, the number of new
listings on both U.S. markets rose above the low figure of 2003.

16 This assumes that the bulge in Euronext listings between 1997 and 2000 is the result of IPO activity, rather than
acquisition of new listings through merger with other exchanges. The WFE data do not make this distinction.
17 Nasdaq, 2005 Annual Report, p. 9.

Table 3. New Exchange Listings (Total, Domestic, and Foreign Companies): 1995-2005
Nasdaq NYSE Tokyo Osaka Euronext London
Total Dom. For. Total Dom. For. Total Dom. For. Total Dom. For. Total Dom. For. Total Dom. For.
1995 476 413 63 173 138 35 32 32 0 27 27 0 28 22 6 330 285 45
1996 655 598 57 278 219 59 61 59 2 38 38 0 74 63 11 397 347 50
1997 648 573 75 273 210 63 51 50 1 27 26 1 121 110 11 254 217 37
1998 487 437 50 205 162 43 57 54 3 13 13 0 287 266 21 202 169 33
1999 614 553 61 151 123 28 75 75 0 24 24 0 119 102 17 187 161 26
2000 605 486 119 122 62 60 206 203 3 61 61 0 108 98 10 399 366 33
2001 144 123 21 144 93 51 93 92 1 55 55 0 49 36 13 245 236 9
2002 121 NA NA 151 118 33 94 94 0 41 41 0 18 15 3 201 193 8
iki/CRS-RL337962003 56 53 3 107 91 16 120 120 0 26 26 0 24 14 10 201 194 7
g/w2004 170 147 23 152 132 20 153 152 1 30 30 0 32 20 12 423 413 10
s.or2005 139 117 22 146 127 19 99 98 1 27 26 1 34 32 2 626 605 21
Source: World Federation of Exchanges.
://wikiNote: Euronext figures before 2001 represent the sum of new listings on the Brussels, Amsterdam, and Paris markets.


Comparing Tables 2 and 3 makes clear that the increase in total listings is considerably less than
the number of new listings. New listings are offset by delistings, which are set out in Table 4.
Table 4 shows no consistent pattern in delisting trends among the six top-tier exchanges between
1995 and 2005. Nasdaq delistings peaked in 1998 and 1999, before the end of the boom; the
NYSE peak was a year or two later. Neither market shows an increase in delistings subsequent to


Table 4. Delistings on Selected Exchanges, 1995-2005
Year Nasdaq NYSE Tokyo Osaka Euronext London
1995 79 136 23 4 63 258
1996 121 98 19 4 97 320
1997 717 171 19 8 94 235
1998 906 194 32 16 88 292
1999 873 254 30 15 100 336
2000 700 286 45 32 124 299
2001 815 215 48 30 140 287
2002 535 145 82 65 99 261
2003 410 111 67 198 82 337
2004 322 107 53 80 67 279
2005 332 135 54 53 65 372
Source: World Federation of Exchanges.
Note: Euronext figures before 2001 represent the sum of delistings on the Brussels, Amsterdam, and Paris
In 2005, 1,011 companies were delisted by the top six exchanges. The exchanges do not publish
statistics on the reasons for delisting. Nasdaq and NYSE annual reports provide some
information, however. Nasdaq reports that delistings occur for three primary reasons:
• failure to meet listing standards (generally minimum financial criteria);
• mergers and acquisitions, where all of the target company’s shares are purchased
by another firm (or traded for shares in the merged company); and
• switching to another venue.18
Of the 332 firms that ceased listing on Nasdaq during 2005, 85 (25.6%) had failed to comply with
minimum share price or other financial criteria, or had failed to file required SEC disclosures on 19
time, which is also grounds for automatic delisting. The NYSE reports a similar percentage:

18 Nasdaq describes the third reason as occurring “to a lesser extent. Ibid., p. 10.
19 Ibid., p. 24.

between 2000 and 2005, 27% of all delistings involved failure to maintain the minimum financial 20
criteria required for continued listing.
Of the nearly three-quarters of delistings that happened for reasons other than financial distress,
most involved a change of ownership or a change in the form of ownership. This includes several
forms of transactions:
• mergers and acquisitions, where two firms become one;
• leveraged buyouts, where a firm’s management or outside investors purchase all
publically traded shares in a listed company and take it private; and
• “going dark” transactions, where a company voluntarily delists itself from a
major exchange and has its shares traded instead on the over-the-counter, or
“pink sheets” market. The firm thus becomes exempt from SEC reporting
These forms of “voluntary” delistings are where regulatory costs are most likely to be a factor.
The next section analyzes trends in mergers and going-private deals and the possible role of
Sarbanes-Oxley costs.
In most large corporate mergers, the consolidated firm remains a public company. Thus,
regulatory compliance costs are not eliminated, though they may be reduced as a percentage of
earnings if two public companies merge into one. Basic data about the corporate merger market,
presented in Table 5, do not support an inference that Sarbanes-Oxley costs are a major factor in
the volume of deals. The number and reported value of deals increased each year between 2002
and 2005, but remained below the figures for 1998 through 2001, when soaring stock prices
encouraged mergers in which target company stockholders received stock in the acquiring firm
rather than cash payments for their shares.
Table 5. Completed Mergers and Acquisitions, 1996-2005
Year Number of Deals Value ($ in billions)
1996 7,347 563.0
1997 8,479 771.5
1998 10,193 1,373.8
1999 9,173 1,422.9
2000 8,853 1,781.6
2001 6,296 1,155.8
2002 5,497 625.0
2003 5,959 521.5

20 NYSE Group, Inc., 2005 10-K Report, p. 8.

Year Number of Deals Value ($ in billions)
2004 7,031 857.1
2005 7,298 980.8
Source: Thomson Financial. (Only deals worth more than $10 million are included, and dollar figures include
only deals for which price data was made public.)
Table 6. Leveraged Buyouts, 1996-2005
Year Number of Deals Value ($ billions)
1996 189 20.1
1997 192 15.4
1998 186 22.3
1999 197 28.7
2000 305 51.2
2001 153 18.9
2002 163 24.8
2003 164 41.4
2004 327 82.0
2005 450 117.4
Source: Thomson Financial. (Only deals worth more than $10 million are included, and dollar figures include
only deals for which price data was made public.)
One of the benefits to corporations involved in leveraged buyouts, a subset of corporate mergers
in which all public shares are purchased and taken off the market, is the elimination of SEC
compliance costs. This market has shown rapid growth since 2001, as shown in Table 6. How
much of the rise can be attributed to increased regulatory costs? Several studies have addressed
this question by attempting to measure changes in the propensity of U.S. firms to go private
before and after Sarbanes-Oxley. Kamar, Karaca-Mandic, and Talley find that small firms were 21
induced to leave the public markets, but that large firms were unaffected. Engel, Hayes, and
Wang find a “modest but statistically significant increase in the rate at which firms go private in 22
the post-SOX period,” with the effect more pronounced among smaller firms. Other researchers
address the difficulty of separating the impact of regulatory costs from other factors:
Because buyouts occur for many reasons, and SEC disclosures to shareholders in public
companies will focus on the value of the consideration to be received compared to current
market values, it is difficult to determine what role the costs of compliance with SOX and 23
other securities laws played in these decisions.

21 Ehud Kamar, Pinar Karaca-Mandic, and Eric L. Talley,Going-Private Decisions and the Sarbanes-Oxley Act of
2002: A Cross-Country Analysis,” USC CLEO Research Paper No. C06-5, August 2006, 60 p.
22 Ellen Engel, Rachel M. Hayes, and Xue Wang, “The Sarbanes-Oxley Act and Firms’ Going-Private Decisions, May
6, 2004, p. 3. Available at SSRN: abstract=546626.
23 William J. Carney, “The Costs of Being Public After Sarbanes-Oxley: The Irony ofGoing Private,’” Emory Law
and Economics Research Paper No. 05-4, February 2005, p. 13.

An important factor behind the increase in leveraged buyouts is the rise of the private equity
market. Private equity investors purchase companies, either private or public, and seek to improve
operating results by restructuring or by providing capital. The activity is not new, but is now a
more significant factor in the market than ever before. The growth has been driven by
institutional investors searching for higher returns. Yields on both debt and equity investment in
the public markets have been depressed over the past several years: blue-chip stock indexes
remained below 2000 levels until the fall of 2006, while both long- and short-term interest rates
have been low by historical standards. At the same time, there has been a “glut” of international 24
capital seeking investment opportunities, making capital abundant at low interest rates. As a
result, “alternative” investments have thrived, including private equity funds.
In short, the boom in mergers and private equity has been produced by a combination of
economic factors and market conditions. The boom continued in 2006, as a recent Business Week
article attests:
[W]hat’s driving this year’s merger mania is quite different from what prompted AOL to
plop down $182 billion for Time Warner Inc. in 2000. That boom was fueled by inflated
stock prices in an overheated equities market that made companies feel like they were
playing with funny money. This time the drivers are low interest rates, low valuations,
and robust debt markets. One telling difference: 60% of this year’s deals have been paid
for in cash, vs. 29% in 2000.... The biggest change, though, is the unprecedented heft of
private equity firms. Morgan Stanley estimates that buyout shops are now armed with at
least $2 trillion in purchasing power, far more than ever before. The number of public-to-
private deals in 2006 is set to nearly double the number in 2000, to 205, while their value
has soared more than tenfold, says Paul J. Taubman, global head of M&A at Morgan
Stanley. Yet there’s still plenty of room for the boom to continue. Many companies still 25
look cheap.
Preliminary figures indicate that the value of companies taken private in 2006 reached a record
level: $150 billion worldwide, with former NYSE listings representing $38.8 billion; London, 26
$27 billion; and Nasdaq, $11 billion.
Another way a public firm can shed its SEC reporting burden is by “going dark.” In this process, 27
firms voluntarily give up their exchange listing and deregister with the SEC. They do not
entirely abandon the public markets; their shares continue to trade on the over-the-counter (or
“pink sheets”) markets. Several studies have linked Sarbanes-Oxley costs to the growing number 28
of going-dark transactions in recent years.

24 See CRS Report RL33140, Is the U.S. Trade Deficit Caused by a Global Saving Glut?, by Marc Labonte.
25 Emily Thornton,What’s Behind the Buyout Binge: Merger Monday, Business Week, Dec. 4, 2006, p. 38. See also
the Committee on Capital Market Regulation’s Interim Report for discussion of the growing liquidity in the private
equity market, with the development of secondary trading of limited partnership interests (pp. 34-38).
26 Peter Smith and Norma Cohen, “Record $150bn of Delistings,” Financial Times, Jan. 2, 2007, p. 1.
27 In order to deregister, firms must have had fewer than 300 shareholders of record (or fewer than 500 shareholders
and less than $10 million in assets) for the preceding three years. When deregistration is complete, the firm ceases
filing financial statements with the SEC.
28 Christian Leuz, Alexander J. Triantis, and Tracy Yue Wang, “Why do Firms go Dark? Causes and Economic
Consequences of Voluntary SEC Deregistrations,” Robert H. Smith School Research Paper No. RHS 06-045, March
2006, 58 p. and: Engel, Hayes, and Wang, “The Sarbanes-Oxley Act and Firms Going-Private Decisions.”

However, firms that go dark are not a representative cross section of listed companies. The
studies find that they tend to have serious financial problems (which might have led to an
involuntary delisting by the exchange). In addition, Leuz, Triantis, and Wang find evidence that
“controlling insiders go dark to protect their private control benefits and decrease outside
scrutiny, particularly when corporate governance is weak and outside investors are less 29
Healthy firms rarely go dark because there is typically a strong negative market reaction. Thus,
even if the causal link between rising regulatory costs and going-dark transactions is robust, the
competitive position of U.S. markets may not suffer as a result: firms going dark are unlikely to
be subject to international competition for listing.

The discussion above has focused on the number of companies listing on U.S. and competing
international exchanges, but listing trends are only part of the picture. The basic economic
function of a securities market is to intermediate between savers and businesses seeking
investment capital. The capacity of an exchange to facilitate capital formation is also an indicator
of its competitive position.
One of the most frequent claims regarding the declining competitiveness of U.S. markets is that
they now handle a much smaller share of the world’s initial public offerings than they once did.
Of particular concern is the fact that of the 25 largest IPOs in the world in 2005, only one took
place on an American exchange. Have rising regulatory costs driven U.S. firms abroad in search
of equity capital, or have foreign firms that might have considered a U.S. offering gone
To begin with the first question, an examination of the 25 largest IPO deals (set out in Table 7)
suggests that the answer is no. The only firm on the list domiciled in the United States listed its
shares on the NYSE.
Table 7 is dominated by French (five) and Chinese (four) IPOs. Most of these deals, including the
China Construction Bank Corporation, the China Shenhua Energy Limited, the Bank of
Communications, the China COSCO Holding Company, and France’s Electricite de France, Gez
de France, Sanef, and Eutelsat, were privatizations of huge state-owned enterprises. It seems
unlikely that the French or Chinese governments would look favorably on a foreign listing for
these firms.
The table indicates that most of the IPO firms chose to list their shares on domestic exchanges.
For example, all the Chinese firms listed on the Hong Kong Stock Exchange and all of the French
firms listed on Euronext. The same holds true for the Austrian, Australian, Danish, Dutch, 30
German, and Japanese firms.

29Why do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations,” p. 3.
30 Ernst & Young, which compiled the list, states that the Chinese Government played a role in encouraging firms to
list on the Hong Kong Stock Exchange, in order to bolster the firms good governance credentials. See Ernst & Young,
“Accelerating Growth, Global IPO Trends 2006, February 2006, p. 15.

It may be noteworthy that the exceptions to this pattern—the two companies from Russia and
Kazakhstan—chose to list in London. Regulatory considerations may have been a factor in this 31
choice. Did the NYSE or Nasdaq seek to obtain these listings?
Table 7. The Largest Global IPOs in 2005
(in millions of U.S. $)
Company Domicile Industry Proceeds Primary Exchange Listing
China Construction Bank Corp. China Banks 9,227 Hong Kong
Electricite de France France Energy and Power 8,200 Euronext
Gaz de France France Energy and Power 4,128 Euronext
China Shenhua Energy Ltd. China Mining 3,276 Hong Kong
Bank of Communications China Banks 2,165 Hong Kong
Tele Atlas N.V. Netherlands High Technology 1,946 Euronext
Partygaming Gibraltar Professional Services 1,658 London
Goodman Felder Ltd. Australia Consumer Stables 1,599 Australia
AFK Sistema Russia High Technology 1,593 London
Huntsman Corp. U.S. Materials 1,593 New York
Raiffeisen International Bank Austria Financials 1,456 Vienna
Premiere AG Germany Media and Entertainment 1,354 Frankfurt
SUMCO Corp. Japan High Technology 1,346 Tokyo
China COSCO Holdings China Marine Transport 1,227 Hong Kong
Spark Infrastructure Group Australia Energy and Power 1,223 Australia
Telenet Holding NV Belgium Telecommunications 1,190 Euronext
RHM UK Consumer Staples 1,171 London
Kazakhmys Kazakhstan Energy and Power 1,166 London
EFG International Switzerland Financials 1,097 Swiss Exchange
Sanef France Industrials 1,088 Euronext
SP Ausnet Australia Energy and Power 1,057 Australia
Eutelsat France Telecommunications 1,030 Euronext
EuroCommercial Properties France Real Estate 1,026 Euronext
TrygVesta Denmark Financials 1,008 Copenhagen
Source: Ernst & Young.

31 A search of periodical databases yields no hint that they did. (Kazakhmys stock trades in the United States on the
over-the-counterpink sheets market, suggesting that it might not meet Nasdaq listing standards.) On the other hand,
the London Stock Exchange appears to have pursued listings from ex-Soviet countries energetically:More than 40
Russian companies attended a London Stock Exchange ‘roadshow’ last year. Several are tipped to seek listings in the
coming months, including Open Investments, owned by Vladimir Potanin, the Norilsk Nickel billionaire.” See Conal
Walsh, “RussiasGoogle aims for London share listing,” The Observer (London), Jun. 12, 2005, p. 2.

Table 8 presents more comprehensive statistics on the IPO market, showing the value of equity
offerings on the six top-tier exchanges and Hong Kong (a second-tier exchange that appears
several times in Table 7). Total equity issues include both IPOs and sales of new stock by
established public companies.
These figures show considerable year-to-year volatility, reflecting not only the variability of stock
prices (which affect the attractiveness of equity sales as a means of raising capital) but also the
skewing of single-year data by the presence (or absence) of a few very large transactions. The
ratio of IPOs to offerings by established public companies also shows great variation from year to
year, probably reflecting the impact of large individual transactions in either category.
Preliminary data suggest that 2006 was a record year for IPOs, with global underwriting 32
exceeding $250 billion. Russian and Chinese firms accounted for just over a quarter of this total.
IPO value on Euronext was up 60% (to $24.5 billion) over 2005, and doubled on the Deutsche
Börse (to $8.8 billion). IPOs on the NYSE raised a total of $25 billion in proceeds (excluding
closed-end mutual funds) in 2006. There were 18 IPOs by non-U.S. companies, raising $6.5 33
billion. The NYSE continues to be a big fish, but the IPO pond is growing.
The most visible international trend is that all markets show a significant drop in equity 34
underwriting in 2000 or 2001, with the end of the bull market. The performance of the two U.S.
exchanges since that time is markedly different: Nasdaq underwritings remain far below the
boom levels—2005 equity issues were less than 10% of the 2000 peak. On the NYSE, by
contrast, the 2005 figure was 78% of the 2000 level.
The post-2000 recoveries in equity issuance on the European exchanges have been strong;
London experienced only a mild drop-off and reached a record high in 2004, while Euronext in

2005 recorded 75% of its 2000 peak, very similar to the NYSE experience.

What does Table 8 suggest about the competitiveness of U.S. markets? The most striking fact is
the dominance of the NYSE as a market for new equity. Its $175 billion in 2005 underwriting was
more than double that of the nearest competitor, and in fact accounted for 29.3% of total global
equity issues. However, the argument is made that the degree of supremacy is diminishing—in 35

1996, the NYSE accounted for 38.3% of the value of global equity issues.

Several factors underlie the growing share of equity issuance going to foreign markets. Many
countries in the world did not have well-developed equity markets until recently; these include
not only China and Eastern Europe, but also France, Germany, and other continental European
states where corporate finance was historically dominated by universal banks. Economic
liberalization has provided an impetus for the development of equity financing, and computer

32 Norma Cohen and Peter Smith,Upsurge in IPOs and Private Deals,Financial Times, Jan. 2, 2007, p. 15. In the
authors’ view, U.S. regulation does not account for the “relative decline in popularity of U.S. exchanges.” Rather, they
argue, “companies domiciled outside the U.S. increasingly look to their maturing home markets, or to the largest
capital market closest to them, as a listing venue of choice.
33 NYSE Group, Inc., “2006 Highlights, Press Release, Dec. 29, 2006.
34 In securities markets, underwriting refers to the process by which companies raise capital by selling (also called
issuing) stocks or bonds to investors. This is also known as the primary market, as distinguished from the secondary (or
resale) market, where investors trade securities among themselves and the company that originally issued the securities
does not share in the proceeds.
35 Global totals from World Federation of Exchanges, annual statistics archive.

technology has made it possible to replicate the sophisticated trading mechanisms of the New 36
York and London exchanges at relatively low cost. Markets have also expanded rapidly in the
high-growth emerging economies of Asia and Latin America.
In short, the fact that U.S. stock exchanges are losing market share in global equity trading may
reflect positive developments elsewhere, rather than impediments imposed here by regulatory and
other burdens. NYSE and Nasdaq have certainly not been complacent in the face of rising
competition. On the contrary, they have taken steps like the following:
• pursued mergers with major foreign exchanges (NYSE with Euronext, Nasdaq 37
with London);
• invested heavily in new trading technology to compete with alternative trading
systems (cheap, computerized transaction facilities); and
• restructured themselves as for-profit, shareholder-owned corporations, in part to
prevent entrenched exchange constituencies (such as the NYSE specialists) with
a financial stake in the status quo from blocking innovations needed to remain

36 Cheap computer technology has inspired many predictions of the imminent demise of the NYSE over the past decade
or so.
37 In fact, the mergers are driven in large part by the European markets’ need to cut their trading costs to U.S. levels,
rather than U.S. markets fear of competition. SeeFinance and Economics: A War on Two Fronts; Stock Exchanges,
Economist, vol. 381, Nov. 18, 2006, p. 92.

Table 8. Value of Equity Offerings on Selected Stock Exchanges, 1996-2005
(dollars in billions)
NYSE Nasdaq London Euronext Tokyo Osaka Hong Kong
IPO Other Total IPO Other Total IPO Other Total IPO Other Total Total IPO Other Total IPO Other Total
1996 50.0 111.0 161.0 24.1 27.7 51.8 16.7 14.0 30.7 NA NA NA 19.0 NA NA NA 4.0 8.9 12.9
1997 43.9 133.7 177.6 11.0 25.2 36.2 11.6 10.7 22.3 NA NA NA 9.5 NA NA NA 10.5 21.1 31.6
1998 43.7 112.7 156.4 13.8 19.7 33.5 6.6 10.8 17.4 NA NA NA 11.8 NA NA NA 0.8 4.2 5.0
1999 71.4 129.5 200.9 50.4 53.5 103.9 7.4 16.0 23.4 NA NA NA 89.2 NA NA NA 2.2 17.0 19.2
2000 73.3 149.7 223.0 52.6 80.8 133.4 14.8 21.3 36.1 49.4 38.0 87.4 16.7 NA NA NA 17.0 60.0 77.0
2001 28.5 49.3 77.8 7.8 24.0 31.8 7.8 21.0 28.8 32.1 45.3 77.4 16.9 NA NA NA 3.3 8.0 11.3
2002 27.2 60.2 87.4 NA NA 4.5 8.1 26.3 34.4 3.5 32.5 36.0 15.7 0.1 2.2 2.3 6.7 7.5 14.2
iki/CRS-RL337962003 27.4 54.2 81.6 NA NA 6.4 7.8 22.6 30.4 0.7 50.5 51.2 29.0 0.1 4.9 5.0 7.6 19.9 27.5
g/w2004 54.5 93.4 147.9 NA NA 15.0 13.8 18.6 32.4 11.7 33.2 44.9 25.9 0.3 5.2 5.5 12.5 23.7 36.2
s.or2005 44.1 130.9 175.0 NA NA 12.2 31.2 20.7 51.9 21.2 44.7 65.9 24.6 0.3 6.2 6.5 21.3 17.0 38.3
Source: World Federation of Exchanges. (Tokyo figures are not broken down into IPOs and follow-on offerings.)


Finally, while equity markets have been an important locus for capital formation for U.S.
businesses, they are only part of the larger securities market. Corporations seeking investment
funds have many options, and in recent years of low interest rates they have turned increasingly
to the bond markets. Figure 4 shows annual dollar figures for U.S. corporate underwriting
between 1996 and November of 2006. Total underwriting, which measures funds going directly to
firms issuing securities, has shown a fairly steady rise throughout the period, suggesting that costs
related to the Sarbanes-Oxley Act’s tightening of securities regulation have not materially harmed
U.S. businesses’ ability to raise funds in securities markets.
Figure 4. U.S. Corporate Underwriting, 1995-October 2006
Source: Securities Industry Association.

This report has not attempted to make a direct measurement of the impact of Sarbanes-Oxley
compliance costs on firm behavior in the equity markets. Instead, the data presented above seek
to provide a context for evaluating claims that such costs have put U.S. stock markets at a
competitive disadvantage. There have been three developments in recent years that might
plausibly be attributed (at least in part) to rising regulatory costs:
• over the past decade, the total number of listed companies on U.S. exchanges has
fallen (in the case of Nasdaq) or failed to grow (in the case of the NYSE), while
several foreign exchanges (notably Hong Kong, Tokyo, and London) have
experienced significant growth in listings;

• there has been a boom in the number and size of going-private transactions,
which result in firms being taken off the public markets and outside the SEC’s
regulatory jurisdiction; and
• the share of global IPO volume handled by U.S. markets has fallen, especially
among the very largest deals.
However, there are alternative explanations for each of these phenomena, based on market
conditions and global economic trends:
• The drop in Nasdaq listings must be viewed in the context of the aftermath of the
1990s bubble, when thousands of technology firms were taken public even
though they had no real prospects of ever turning a profit. The NYSE’s stable
listings figure, on the other hand, may be due to a policy of maintaining stringent
listing standards that exclude all but the largest and most financially sound
• The private equity boom has been driven by market forces including the
availability of relatively abundant and inexpensive debt financing, the pressure
on pension fund managers and other institutional investors to seek returns higher
than those offered since 2000 by traditional investment classes, and the high 38
compensation levels earned by private equity managers. Research has indicated
that rising regulatory costs have a discernible impact on going-private decisions
primarily among small firms, particularly those with financial or governance
• Growth in foreign equity underwriting appears to reflect growth in foreign
economies (such as China’s) and/or the development of equity markets in
countries that historically relied on bank financing (such as Germany).
Corporations continue to show a strong preference for listing on their domestic
market, or the closest major financial center. The data do not suggest that many
U.S. firms are choosing to list on foreign exchanges, or that foreign firms have
abandoned U.S. markets in significant numbers since Sarbanes-Oxley was
The impact of Sarbanes-Oxley costs is difficult to measure, but quantification of the benefits is
even more elusive. It is worth noting, however, that international competition among stock
markets has not up to now taken the form of a regulatory “race to the bottom,” in which markets
attempt to lure companies by offering a more lax regulatory regime than their competitors. There
is no equivalent in equity markets to the offshore banking centers and tax havens that thrive in
small jurisdictions like the Dutch Antilles, the Isle of Man, or Vanuatu. This fact reflects a market
judgement that investor confidence, which is nurtured by the perception that exchanges and
regulators devote significant resources to the prevention of fraud, has real economic value. Where
stock market growth has been fastest, as in London and Hong Kong, the securities regulators are
generally recognized as capable and vigorous.
The outcome of global stock market competition has different implications for different market
participants. If U.S. issuers and traders go overseas, to take advantage of lower regulatory or
other costs, the U.S. securities industry will suffer a loss of output and jobs. That industry is

38 Andrew Ross Sorkin and Eric Dash, “Private Firms Lure CEOs with Top Pay, New York Times, Jan. 8, 2007, p. A1.

concentrated heavily in the greater New York area and, to a lesser extent, Chicago. The cost to the
U.S. economy of such a shift, however, would be partially offset by lower trading and
underwriting costs, which would mean higher returns for public investors and more efficient
business investment spending. To the investors and businesses who use the market, the ranking of
the U.S. securities industry in the world market is of secondary importance. If U.S. markets
remain competitive, both the industry and its customers can continue to thrive. The United States
has been (and continues to be) the world leader in the adoption of new, cost-saving technology
and in the elimination of anti-competitive market structures and practices. International market
trends over the past several years do not provide strong evidence that a serious loss of
competitiveness has occurred, or that such a loss is inevitable unless regulatory costs are reduced.
Mark Jickling
Specialist in Financial Economics, 7-7784