On the Competitiveness of the Canadian Stock Market Ce´cile Carpentier, Jean-Franc¸ois L’Her & Jean-Marc Suret* Even if the competitiveness of the Canadian securities market is a central argument in the ongoing debate related to the proposal of a single securities commission, the exact level of competitiveness and the evolution of this market are largely undocumented. The numerous changes that modified the structure of the securities market during the last twenty years probably explain this lack of evidence. Two dimensions of the market’s competitiveness deserve attention. The first one is the proposition that the Canadian market is unable to compete with other markets in attracting and keeping new listings and transactions. The second one is the proposition that a discount penalizes firms that finance in Canada relative to the U.S. We address the first proposition by carefully analysing the evolution of the Canadian market from 1990 to 2007 in terms of market capitalization, number of listed companies and trading volume. We then compare the increase observed in Canada with similar data from other countries. We analyze the discount argument in light of recent studies that explain this phenomenon, and document this discount on other markets. The objective of this article is to provide documented evidence that could ground the debate on the optimal regulatory structure for the Canadian market. Meˆme si la compe´titivite´ du marche´ canadien des valeurs mobilie`res est un argument central du de´bat qui entoure la cre´ation d’une commission unique des valeurs mobilie`res, le niveau exact et l’e´volution de ce marche´ sont mal connus. Les nombreux changements qui ont touche´ la structure de ce marche´ au cours des vingt dernie`res anne´es expliquent probablement cette lacune. Nous pensons que deux dimensions de cette compe´titivite´ me´ritent d’eˆtre analyse´es. La premie`re est cet argument qui veut que le marche´ canadien soit mal arme´ pour faire face a` la concurrence des autres marche´s. Il ne serait en mesure ni d’attirer de nouvelles inscriptions ni de conserver les transactions. Le second argu- ment indique que les e´metteurs canadiens souffriraient d’un escompte lors de la vente de leurs actions. Nous traitons le premier argument en analysant soigneusement l’e´volution des principaux indicateurs de de´veloppement du marche´ entre 1990 et 2007. * Cecile Carpentier and Jean-Marc Suret are Professors at Laval University Que´bec, and Fellows of CIRANO (Montreal). Jean-Franc¸ois L’Her is from La Caisse de de´poˆt et placement du Que´bec. Contact Author: Jean-Marc Suret, email: jean- [email protected]. The views expressed in this article are those of the authors and do not necessarily reflect the position of the Caisse de de´poˆt et placement du Que´bec. The authors thank Jacques Saint-Pierre for his very helpful comments. Any remaining errors are own. 288 BANKING & FINANCE LAW REVIEW [24 B.F.L.R.] Il s’agit de la capitalisation, du nombre de socie´te´s inscrites et des volumes de trans- action. Nous comparons ensuite l’e´volution canadienne a` celle des autres pays. Nous analysons l’argument de l’escompte en utilisant les travaux re´cents qui expliquent l’origine de cet escompte et qui montrent qu’il existe e´galement dans la plupart des pays. L’objectif de l’article est d’alimenter le de´bat relatif a` la structure de la re´gle- mentation des valeurs mobilie`res au Canada a` l’aide de donne´es rigoureuses. INTRODUCTION Recently, a great deal of attention has been devoted to the health of the Canadian securities market, in conjunction with the proposal of a single securities commission. According to the Wise Person Committee Report, the weaknesses of the Canadian Securities regulation system make Canada less competitive than it should be at a time of increasing global competition.1 The Committee reports that many capital market participants, large institutional investors and market intermediaries ar- gue that Canada’s international competitiveness suffers as a result of the current structure and that it is disadvantaged internationally because of its regulatory system. The Task Force to Modernize Securities Legisla- tion in Canada was commissioned in June 2005 by the Investment Dealers Association of Canada, with the mandate of making recommen- dations to modernize securities legislation in Canada that would main- tain or enhance the competitiveness of Canada’s capital markets. The general hypothesis underlying these reports is that the competitiveness of the Canadian securities market is indeed low and that Canada lacks the conditions to attract and keep new listings and trading volume. This concern relative to the competitiveness of the Canadian se- curities market has been exacerbated by the global situation of intensified competition among exchanges and by an apparent decline in the relative weight of North American Markets. The decrease in the relative share of initial offerings resulting from a shift to London Alternative Invest- ment Market (the AIM), launched in 1995, as well as the Asian markets, has raised serious concerns south of the border, as clearly illustrated in the report commissioned by the mayor of New York and Senator Schu- mer.2 This report notes a decline of 4% to 7% in New York’s relative 1 Wise Person Committee, It’s Time (Ottawa: Report to the Minister of Finance, Government of Canada, 2003) online: Ͻhttp://www.wise-averties.ca/reports/WPC%20Final.pdfϾ [It’s Time]. 2 McKinsey & Company, Sustaining New York’s and the U.S.’ Global Financial Services Leadership (New York: Report commissioned by New York’s Mayor and Senator Schumer, THE COMPETITIVENESS OF THE CANADIAN STOCK MARKET 289 share of financings and the loss of a significant number of jobs in the financial sector, and attributes this situation to regulatory causes, among others. In a work entitled The Competitive Position of London as a Global Financial Centre, Yeandle et al.,3 evidence the strong increase in the volume of equity transactions on the London Stock Exchange relative to the New York Stock Exchange. A recent paper by Rousseau4 evidences that the AIM has been extremely successful in attracting investors and issuers, including a number of Canadian public companies. However, Rousseau concludes that the importation to Canada of the regulatory model used by the AIM would be very difficult. The present article is justified by the observation that, even if the lack of competitiveness of the Canadian securities market is underlined in numerous documents and reports, evidence of the current and past situation of the Canadian stock market relative to the other developed markets is scarce. Harris advocates more empirical analysis to inform the debate on securities regulation in Canada. He contends that “the debate in Canada [...] typically has not been informed by robust empirical analysis.”5 Probably because of the lack of empirical evidence, opinions about the strength of the Canadian market diverge considerably. The various reports wrote by the successive task forces in Canada generally evoked the lack of competitiveness of the market. However, for Boisvert and Gaa “In Canada, the number of shares traded on the Toronto Stock Exchange (TSE) has doubled in the last five years, while the dollar value of trading has increased three-fold. Some 49 per cent of Canadians now hold equities in some form, twice the level of involvement recorded only 2006) online: Ͻhttp://www.senate.gov/ϳschumer/SchumerWebsite/pressroom/special reports/2007/NY REPORT%20 FINAL.pdfϾ; See also L. Zingales, Is the U.S. Capital Market Losing its Competitive Edge?, ECGI – Finance Working Paper (2007) 192 online: Ͻhttp://ssrn.com/abstractϭ1028701Ͼ. 3 M. Yeandle, M. Mainelli, & A. Berendt, The Competitive Position of London as a Global Financial Centre, (Corporation of London’s Report, 2005) online: Ͻhttp:// www.cityoflondon.gov.uk/NR/rdonlyres/131B4294-698B-4FAF-9758-080CCE86A36C/ 0/BC RS compposition FR.pdfϾ. 4 S. Rousseau, “London Calling?: The Experience of the Alternative Investment Market and the Competitiveness of Canadian Stock Exchanges” (2007) 23:1 B.F.L.R. 51. 5 D. A. Harris, “A Symposium on Canadian Securities Regulation: Harmonization or Nation- alization?” (2002) [unpublished, online: Ͻhttp://www.tsx.com/en/tradingServices/docs/2279SymposiumBrochure.pdfϾ at 3]. 290 BANKING & FINANCE LAW REVIEW [24 B.F.L.R.] 11 years ago.”6 According to Jenkinson and Ljungqvist, Canada ranks ahead of the U.S., Japan and the U.K. in terms of increases in stock exchange listings from 1981 to 1998.7 Freedman and Engert conclude that “data do not provide much support for the view that domestic capital markets have been abandoned by Canadian firms or hollowed out in recent years.”8 The discrepancy of opinions regarding trends in the Canadian stock markets can be traced primarily to the lack of clear-cut evidence. Ex- ploiting the historical data pertaining to the Canadian markets is a real challenge, due to several changes in the market and in the reporting methods. Most data available for Canada are provided by the stock exchanges and are characterized by several difficulties: The merger of several exchanges, double counting of several stocks before the merger of the exchanges, the merger and the associated delisting of several securities and the inclusion at the beginning of the 1990s of several large foreign corporations in the estimation of the Canadian stock market capitalization, followed by their exclusion during the 1990s. Moreover, divergent opinions about the health of the Canadian stock market are fostered by the specific situation of this market in terms of cross-listing. According to Karolyi, Canada has the world’s largest number of secu- rities listed abroad (211 in 2002); the next country is Israel, with 59 foreign listings.9 Several Canadian-based corporations post high trans- action volumes on American stock markets, specifically corporations listed on the National Association of Securities Dealers Automated Quo- tations (NASDAQ).