CONVERGENCE OR DIVERGENCE IN CORPORATE GOVERNANCE: EMPIRICAL EVIDENCE 47
1. THE ROLE OF CAPITAL MARKETS
1.1 The increasing use of stock markets49
As highlighted in Chapter 2, the market-oriented or outsider system is characterised by an intensive use of the stock market for the funding of corporations.
In contrast, equity markets are significantly less important in the network-oriented or insider system.
Table 1 illustrates the importance of stock market finance in terms of the evolution of market capitalisation of listed companies as a percentage of the Gross Domestic Product (GDP).
A first observation is that all Continental European countries have witnessed a strong growth in market capitalisation ratio since 1975, especially Switzerland and the Netherlands50. In contrast, Belgium lost an important part of its market capitalisation from 1999 onward due to the fact that a number of large listed firms were de-listed after being taken over by foreign owners. This decreased market capitalisation could not be compensated for by the numerous initial public offerings
49 Recently the absolute volume of market capitalisation decreased, mainly due to decreasing market prices. This less attractive market environment induced a substantial lower reliance on the stock market for new capital funding and even led to de-listings. This is not taken into consideration in our analysis. However, this omission does not influence the final conclusions on convergence.
50 From another study, it becomes clear that the success story in Greece was even more pronounced. The ratio market capitalisation to GDP soared from 15% in 1995 to 167% at the end of 1999. For a more detailed analysis of the figures, see Mertzanis (2000).
(IPOs) of smaller and mid-sized firms. Secondly, the U.S. is no longer the ultimate example of market-oriented country. Although the absolute size of the stock market is the highest in the US in relative terms (total market capitalisation in comparison to GDP), the U.S. only ranked first until the mid 1980s. During the last decade, the U.K. and especially Switzerland played the leading role. Between 1996 and 1999 the market capitalisation ratio of Switzerland almost doubled to 268%.
Increasingly, capital markets serve as a vehicle of raising equity capital by IPOs (Table 2) as well as for attracting extra capital to finance growth and expansion. A striking example of reliance on capital markets to finance growth is the Netherlands.
As Table 2 shows, between market-oriented and network-oriented models there was a decrease over time in the difference in the volume of equity finance raised by initial public offerings. Between 1990 and 1997 Continental European countries raised on average only a small fraction of equity capital while U.S. and U.K.
companies raised on average 1% of GDP as equity capital. In 1998 and 1999, equity raised through IPOs in many Continental European countries was as high or higher as in U.S. or U.K. However differences within the network-oriented countries remain.
The statistics in Table 1 and Table 2 show that the Anglo-American stock markets can no longer be seen as the only examples of 'market-oriented countries'.
Quite a number of Continental European countries are at least as financial market- oriented as the former. While for these countries there is a growing convergence with the outsider system, other Continental European countries lag behind, hereby creating a growing divergence within the EU.
1.2 New market formats
1.2.1 New exchanges and trading platforms are created
In the 1990s a number of projects were launched which significantly changed the existing stock market landscape in Europe. In several countries new stock exchanges were created particularly for small growth companies. In the U.K., the London Stock Exchange created an "Alternative Investment Market". In France, the Paris Bourse
"Nouveau Marche" was established and the German "Deutsche Börse" created the
"Neuer Market". Parallel, Easdaq, an exchange patterned after the U.S. Nasdaq, was founded and began trading as a pan-European exchange for growth stocks in 1996.
However, it only was a moderate success and in 2001 Nasdaq acquired a majority share of Easdaq. Recently, one of the former leaders of Easdaq pointed to the vivid nationalistic attitude of the different national stock exchanges and politicians as one of the main reasons behind the slow development of Easdaq51. Although companies across Europe increasingly rely on external finance as a common trend, national stock exchange initiatives still differ from each other within the European Union.
However, some important consolidations of stock markets appeared. The Amsterdam Stock Exchange, the Paris Bourse and the Brussels Exchanges merged to form Euronext. Later, the "Bolsa de Valores de Lisboa e Porto" joined Euronext52. The consolidation movement continued with the acquisition London International Financial Futures and Options Exchange (Liffe) by Euronext. Equity trading53 will take place on a single integrated trading platform with a single set of trading rules, but under three jurisdictions depending on where the company is listed and where the market participant is located.
Also London Stock Exchange and Deutsche Börse initially declared to merge.
The merger was criticised both in the U.K. and in Germany from the very beginning.
The London Stock Exchange turned down the iX project in September 2000. At the same time, OM Gruppe launched a hostile, but unsuccessful take-over on London Stock Exchange.
Besides equity market innovations, also bond markets gets modernised. As an example, EuroMTS provides electronic trading facilities for bonds and started trading in German "Pfandbriefe". Electronic commerce in European bonds will be offered by one major platform, after a merger of BondVision and BondClick54. 1.2.2 The internet breaks down geographic barriers and creates many innovations
New Internet services created the possibility of trading securities in a fast and cheap way. Emerging Internet based rivals of the traditional exchanges appeared, such as Tradepoint, EuroMTS and other Electronic Communications Networks (ECN). Tradepoint is an electronic stock exchange, based in London and operating
51 Mampaey (12 September 2001).
Financieel-Economische Tijd (15 June 2001).
53 There will also be trading platforms for bonds, derivatives and commodities.
Financieel-Economische Tijd (18 May 2001).
52
54
under the Investment Services Directive. Prigge (2002) reports that ECN’s account for about 33% of dealings in Nasdaq shares, among the largest are Instinet (13,2%) and Island (11,5%).
Virt-X, a new stock exchange that was launched in June 2001 received the approval from the Securities and Exchange Commission (SEC) to sign up investors in the U.S.55. Blue chips of the Zurich Stock Exchange and Tradepoint moved to the New Market and made of the Zurich Stock Exchange an exchange for small and midcaps56.
The creation of cross-border electronic networks that match buy-side and sell- side investors, cutting out middleman, reduce costs and enhance international trading. The influence of the integration of stock markets and information processes is expected to facilitate web-based trading. The orientation of different classes of investors is therefore no longer national but international.
1.2.3 Demutualisation of stock exchanges
The competition between stock exchanges is enhanced by a trend of demutualisation of exchanges forcing them to a more commercial-oriented approach. Some recent cases of demutualisation are the Stockholm Stock Exchange (1993), Helsinki Stock Exchange (1995), Copenhagen Stock Exchange (1996), Amsterdam Exchanges (1997), Borsa Italiana (1997), Australian Stock Exchange (1998), Stock Exchange of Singapore (1999) and the London Stock Exchange which changed into a stock corporation in March 2001.
1.3 These evolutions will certainly influence governance structures and rules Stock exchanges play an essential role in ensuring that investors have access to transparent financial information about companies and in promoting basic standards of corporate governance57. The integration of stock markets will lead to increased competition with respect to corporate governance standards. As a consequence, companies that seek capital are forced to comply with international standards regarding disclosure and governance. This evolution is enhanced by multiple listings of large corporations. For example, according to a Dutch survey a disciplining effect of foreign stock exchanges can be observed with Dutch multinationals being listed on the New York or the London Stock Exchange. The latter require more disclosure than the Amsterdam-Euronext market58.
55 Boland (2001).
56 Mampaey (23 July 2001).
57 Price Waterhouse( 1997).
58 Another example of the interaction between governance and multiple listing is found in Israel. When the Tel Aviv Stock Market went dormant due to the financial crash in 1994, a large number of Israeli corporations sought listings abroad, especially in the United States. In 1998 the Brodett committee was installed to examine the conditions under which the Israeli stock market could be revitalised and it recommended a simplified dual listing procedure. However, discussions in Parliament revealed that the industry plead for an automatic dual listing, arguing that the American rules sufficiently protect
However, the process of capital market integration is hampered by the national organisation of regulators, law regimes, etc. More than 30 stock markets are operating in Europe, all having different supervisory authorities. The implementation of new procedures to enhance the development of a European capital market, was delayed when the Thirteenth company directive (or take-over directive) was not accepted by the European parliament59. In order to eliminate the barriers to a true European financial market place, the European Commission is currently discussing new rules and recommendations.