In this global world, money flows freely from one continent to another in a matter of seconds, fueling talk that Lower Manhattan might be losing its status as capital of capital.
Up-and-coming companies in both mature and emerging econ¬omies are seeking to tap capital wherever it is available, spurring strong competition with New Yorks markets.
But, according to Stavros Peristiani, assistant vice president in the research and statistics group at the Federal Reserve Bank of New York, the global merger trend led by U.S. stock exchanges might help stem that tide.
A recent plunge in the number of foreign firms listing initial public offerings on the New York Stock Exchange and the Nasdaq suggests that the U.S. equity market is becoming less attractive to certain issuers, said Mr. Peristiani, who wrote a research paper called Evaluating the Relative Strength of the U.S. Capital Markets. It appears in the latest issue of the New York Feds Current Issues in Economics and Finance magazine, published in late July.
Our analysis, however, reveals that evidence on the competitiveness of the U.S. equity market is mixed, and that the same trends seen in the U.S. market are also shaping equity markets abroad. Overall, the NYSE and the Nasdaq continue to be the worlds most actively traded markets, Mr. Peristiani wrote.
POs and mergers
The New York Fed economist noted in the paper that although IPOs represent a relatively small fraction of global market transactions, they provide crucial growth for established stock exchanges, an important barometer of stock market performance and strength.
In 2006, both London and Hong Kong almost matched New York in terms of IPOs conducted $52 billion in the U.S., according to the research paper. Just six years earlier, IPOs in the U.S. raised $70 billion, vs. only $20 billion each in London and Hong Kong. Moreover, only one of the top 20 global IPOs in 2006, in terms of dollars, was listed in the U.S. Further, the U.S. share of global dollar-denominated IPO proceeds fell to a low of 20% in 2005-2006, from an average level of 35% in 1990-2004.
The diminishing presence of foreign IPOs in the U.S. market may be a response to the costs of implementing U.S. accounting standards, arguably greater legal obstacles faced by companies operating in the country, and higher equity underwriting fees, Mr. Peristiani added. Some in the business community also contend that the more rigorous regulation introduced by Sarbanes-Oxley has raised the costs of listing in the United States.
The New York Fed economist pointed out that other exchanges outside of the U.S. have experienced a decline in new foreign listings, in part because of the adoption of trading technology by up-and-coming financial markets.
For instance, according to Russell Investment Group, Tacoma, Wash., the rise of the markets in the economic zone known as Greater China the Peoples Republic of China, including Hong Kong, and Taiwan the market capitalization of companies traded on those exchanges reached $5.6 trillion at the end of May, topping the market cap of stocks traded on Japanese exchanges, where it was just $5 trillion. This included listings on the Shanghai Stock Exchange, which is regaining its luster as a major market, having been Asias largest exchange until World War II.
Fifty IPOs conducted in the second quarter on the Greater China markets raised $15.5 billion, almost as much as the $15.7 billion floated in the U.S. between April and June.
Yet, U.S. markets are ready for the global competition through trans-Atlantic acquisitions.
In April 2007, the NYSE formally acquired Euronext, and in May 2007, the Nasdaq and the OMX Nordic Exchange agreed to merge, Mr. Peristiani wrote. These trans-Atlantic activities are perhaps the first steps toward the establishment of truly global stock markets.
The economy of scale at a global level could ensure New Yorks lasting role as the capital of capital, and, through the sheer size of the exchange conglomerates, ensure the ability to remain major money-raising centers. Competition in the exchange consolidation sector is truly global, however; on Aug. 17, Borse Dubai, owned by the emirate, launched an all-cash counter-offer for OMX thats about 15% higher than Nasdaqs.
Bond market erosion
One area where U.S. markets may be clearly losing some footing is in the corporate bond market, increasingly challenged by Eurobond issuance. In large part, the situation stems from major changes that reshaped European finance in the 1990s: the relaxing of financial regulations, decreased reliance on banks as intermediaries and the launch of the euro as a major currency.
These developments have shrunk underwriting costs abroad and helped the Eurobond market surpass the U.S. bond market as the worlds largest site for debt underwritings, Mr. Peristiani wrote. Moreover, the self-regulatory environment and greater variety of financing instruments offered by the Eurobond market have been especially appealing to top-rated U.S. financial issuers.
The share of U.S. companies issuing corporate bonds in the U.S. dropped to 82% in 2006 from 92% in 1995. Also, European issuers borrowing in the U.S. bond market dropped to 9% in 2006 from 20% in 2000.
The Eurobond market gives U.S. borrowers access to a wider range of lenders and debt instruments, enabling them to diversify their sources of long-term funding, Mr. Peristiani added. Interestingly, the Eurobond markets global market share would be even larger if we factored in specialized asset-backed issues such as collateralized debt and loan obligations.
The economist said that asset-backed issues in the Eurobond market surged to $700 billion in 2006 from $45 billion in 2000, in part because European regulations favor structured products a type of debt used by hedge funds because it fits well within their complex strategies.
In many ways, the rush of investment-grade U.S. corporations to issue in the Eurobond market is a by-product of financial globalization trends; nevertheless, it does raise concerns for the American debt market, Mr. Peristiani wrote. In an extreme scenario, most high-grade U.S. companies could issue exclusively overseas, leaving the domestic bond market to be dominated by lower rated companies.