Market efficiency depends on the ability to freely trade secure interest in Assets (i.e., goods, services, and the corporations that produce them). Indeed, markets are enabled by two characteristics: Security and Liquidity. Security is the ability to register and retain ownership of an Asset; an asset is Secure if it is resistant to theft or destruction by others. Liquidity is the ability to exchange an asset for another of equal value: The owner of a Liquid Asset does not have to pay a significant fee to sell an Asset for its full value.
Without Security and Liquidity the gears of capitalism wear down and can grind to a halt. Conversely, enhancing Security and Liquidity can result in as much economic production and progress as the development of Assets themselves, since without the ability to Secure and Liquidate Assets there is little incentive to produce them in the first place.
Capital market regulation in recent years has begun to cannibalize Liquidity in an attempt to enhance Security. Michael Malone explains today in the WSJ:
In the zeal to punish the excesses of the dot.com boom, the federal government, with the tacit approval of the electorate, sought to not only punish the small number of real evildoers but also build the perfect universal plugs for all of the perceived holes in existing business practices.
The result was Sarbanes-Oxley, Regulation FD and stock option valuation — three great lessons in the law of unintended consequences. Let’s do our own accounting: Thanks to this troika, fewer new companies are going public; economic power is being concentrated in the hands of fewer companies; competition is reduced; new wealth is less widely distributed; the rich are getting richer; fewer talented people want to join entrepreneurial ventures; and corporate boards are getting stupider and more paranoid. And, please note, one of the crucial triggers for economic booms — a burst of young tech company IPOs — has now largely evaporated.
Just curious, but is this really what federal regulators, Congress and shareholder rights activists had in mind?
The Committee on Capital Markets Regulation offers a good set of analyses and recommendations for enhancing our capital markets. They suggest that we can measure the competitiveness of a capital market with figures like the “listing premium,” which is the increase in stock price created by listing a stock in one market versus another, and which would be based on the enhanced regulatory assurances to investors minus the increased costs of regulatory compliance. Indeed, the listing premium of U.S. stock markets has collapsed recently, and there is evidence that it’s not just because foreign markets are getting more competitive.