Choking the Recovery: Why New Growth Companies Aren’t Going Public And Unrecognized Risks Of Future Market Disruptions – Harold Bradley and Robert E. Litan, Nov. 12, 2010 [The authors are Chief Investment Officer and Vice President for Research and Policy, respectively, at the Ewing Marion Kauffman Foundation]
“A strong, sustained recovery will require the formation and growth of new scale companies. These companies, in turn, often require access to equity capital as they grow. Traditionally, this has best been accomplished by the floating of shares in an initial public offering (IPO). IPOs have been down substantially over the past decade. Many factors have been alleged to have contributed to this trend, among them, the higher regulatory cost of going and remaining public under the Sarbanes-Oxley Act (SOX) of 2002. But a far more important, and heretofore unrecognized, deterrent to growth company IPOs is the proliferation of new indexed securities derivatives essentially. Initially, these products took the form of mutual funds; now they are increasingly represented as “exchange traded funds” or ETFs. We show here that ETFs are radically changing the markets, to the point where they, and not the trading of the underlying securities, are effectively setting the prices of stocks of smaller capitalization companies, or the potential new growth companies of the future. In the process, ETFs that once were an important low-cost way for investors to assemble diversified stock holdings are now undermining the traditional price discovery role of exchanges and, in turn, when combined with the high Sarbanes Oxley compliance costs for small companies are discouraging new companies from wanting to be listed on U.S. exchanges.”
Related postings on the financial system
Sorry, comments are closed for this post.