WASHINGTON, March 26, 2008 – The New York Stock Exchange’s (NYSE) foreign company delisting rate skyrocketed to 15.1% in 2007 from 6.6% in 2006, according to a new study by the Committee on Capital Markets Regulation (CCMR).
The study also found that the dramatic increase in foreign company delistings in 2007 was more than double the average rate of 7.3% in the 10-year period from 1997 to 2006. By contrast, domestic company delisting rates – which largely reflect mergers – increased to only 8.0% in 2007 from 5.9% in 2006.
The findings will be discussed at the U.S. Chamber of Commerce’s Second Annual Capital Markets Summit: Strengthening U.S. Capital Markets for All Americans, by Hal S. Scott, Nomura Professor, International Financial Systems, Harvard Law School and Director of CCMR.
“It is likely not a coincidence that the new SEC rules permitting deregistration by foreign companies with relatively low U.S. trading volumes became effective June 4, 2007,” Prof. Scott said. “Of the 68 foreign companies that delisted in 2007, 50 – or 74% – delisted on or after June 4. To a certain extent, the 2007 spike in foreign delistings represents pent-up demand to leave. This pent-up demand, however, is itself a reflection of the unattractiveness of the U.S. public equity market.”
The Committee first reported a significant increase in foreign company delistings in its December 4, 2007 report, The Competitive Position of the U.S. Public Equity Market (available at www.capmktsreg.org). At that time, the Committee said a record number of foreign companies had delisted from the NYSE as of October 2007.
Since the December report, the Committee has examined the nationality and market valuations of the delisting companies and found that delisting companies were overwhelmingly from Western Europe. Of the 53 companies that delisted not due to an acquisition, 43 were from Western Europe (8 each from the UK and France and 7 from Germany) and 4 were from Australia. Only 5 of the 53 delisting companies were from emerging market countries—Chile (1), Brazil (1), Hong Kong/China (2) and Israel (1).
Litigation, Poor Regulatory Process Offset Listing Premiums for Many Companies
The Committee also examined the market valuations of the delisting companies using “Tobin’s Q” to understand if the U.S. was only losing companies not getting a premium by listing in the U.S. Tobin’s Q – essentially the ratio of a company’s market value to the book value of its assets – measures the listing premium. A Tobin’s Q greater than 1 indicates that the market places a value on the company greater than its book value. A Tobin’s Q less than 1 indicates that the market places a value on a company less than its book value.
For each delisting company, the Committee determined its Tobin’s Q as well as the average Tobin’s Qs of companies from the same home country in the same economic sector that had not listed in the U.S. (“the compatriot set”). Finally, for each delisting company, the Committee looked at the ratio of its Tobin’s Q to the Tobin’s Q of the compatriot set – a rough measure of the U.S. listing premium enjoyed by the delisting company. The Committee found:
- Of the 40 companies for which a compatriot set could be identified, the average U.S. premium of the delisting company was 17%.
- For the 3 delisting companies from emerging markets, the average U.S. listing premium was 38%.
- For the 37 delisting companies from developed markets, the average U.S. listing premium was 15%.
Prof. Scott said, “One economic study has contended that U.S. listing premiums evidence the competitiveness of the U.S. public equity market. However, the fact that foreign companies enjoying listing premiums are leaving the U.S. suggests that listing premiums do not ensure competitiveness. We suspect the reason so many foreign companies with listing premiums are delisting is litigation and a poor regulatory process which are significant enough factors to countervail the benefit from listing premiums.”
CCMR is a non-partisan committee of independent U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders. It was formed in the fall of 2006 to study and report on ways to enhance the competitiveness of the U.S. capital markets.
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