Where Are the IPOs?

Wall Street worries that New York is no longer the center of the financial universe.

AT GEORGETOWN recently, Treasury Secretary Henry M. Paulson posed a question to some of the most influential minds in American finance: "Have we struck the right balance between investor protection and market competitiveness?" The answer from many of the conference's luminaries was no, reflecting Wall Street's current preoccupation: the contention that American capital markets, especially those in New York, are becoming less competitive. And the remedy, according to a growing list of prominent business leaders, is to soften the Sarbanes-Oxley regulations adopted after Enron Corp.'s collapse. Even so, in coming months Mr. Paulson should advocate a cautious approach to policymaking as pressure to loosen oversight increases.

Over the past couple of years, foreign companies have increasingly offered stock on exchanges outside of New York. Others have delisted. Many U.S. firms, meanwhile, have left the stock markets in favor of private ownership. According to a growing body of critics, these developments indicate that compliance with federal reporting requirements has become too costly, forcing companies to look outside the United States for capital.

But the loss of initial public offerings to foreign markets only demonstrates that U.S. capital markets have become less attractive relative to others, not that they have declined in absolute efficiency. We have argued in the past that factors entirely beyond American policymakers' control may explain this trend. As markets in Southeast Asia and elsewhere become more efficient and better regulated, they will attract more capital seekers. That is not bad for the American economy. Robust regional markets will encourage the development of foreign economies, creating larger markets for U.S. exports. The move to private equity, meanwhile, in part reflects the recent period of low interest rates, which enabled private equity groups to buy up public companies.

A report that the U.S. Chamber of Commerce released in advance of the Georgetown University conference acknowledged these factors but also offered a series of recommendations for improving the Sarbanes-Oxley regime, some of which would require additional legislation. Among the Chamber's good ideas: to encourage savings by requiring employers of a certain size to offer employees access to retirement accounts and by streamlining the 401(k) process; and to encourage companies to eliminate quarterly earnings reports, which place pressure on executives to meet short-term projections rather than investing in long-term growth. But now is not the time for more ambitious legislation, which would open the door to a loud and probably counterproductive fight over the Sarbanes-Oxley law. Despite its faults, the 2002 reform has done much to improve corporate transparency -- which, in the long run, will keep investors in U.S. markets and maintain a large pool of capital for firms to tap.

Regulators must be clearer and more consistent in their enforcement of Sarbanes-Oxley. In particular, auditors need reasonable guidance in their interpretation of the law's Section 404, which requires firms to conduct internal checks on accounting procedures. Pressing for that, not a broad retreat from corporate transparency, should remain policymakers' goal.