A new study from the University of Michigan Law School’s Empirical Legal Studies Center finds that it is more difficult today for politicians to impose excessive financial regulation because firms can migrate to jurisdictions with more pro-market policy. The author notes tht this is less true for institutions, such as big banks, that want government protection, but laissez-faire entities such as hedge funds have substantial ability to flee bad government policy:
Jurisdictional competition spread from corporate law to its close cousin, securities law. Historically, issuers listed their stock for trading on one of the exchanges in the country where they principally did business. Improvements in communication and related technologies, however, have made possible an international market for stock exchange listings that resembles in many respects the long‐standing federal market for corporate charters in the United States. Now companies can list their shares for trading on exchanges in any number of countries; there is no longer a logical nexus between the site of a company’s headquarters and where its shares are traded. …Does that free movement of capital limit the ability of the Obama administration to reform financial regulation in the United States? …After the United States effectively raised listing standards by enacting the Sarbanes‐Oxley Act in 2002, foreign companies headed for the door. London seized the opportunity; fourteen of the top twenty initial public offerings (“IPOs”) listed on the London Stock Exchange (“LSE”) came from outside the United Kingdom in 2005 to 2008. By contrast, only four of the top twenty IPOs in New York came from outside the United States. Further, it was not only foreign companies that were leaving; United States companies left the public market in droves, headed for the greener (or at less regulated) fields of private equity, and they were not being replaced. A Grant Thornton study documented a staggering thirty‐nine percent decline in United States listings from a peak of 8,823 in 1997 to only 5,401 in 2008. …hedge funds can go elsewhere if a country tries to enmesh them in red tape. Running a hedge fund only requires an office and an Internet connection. …Debates over hedge fund regulation take place against the shadow of the threat of the flight of these financial intermediaries. And that flight has already begun. The United Kingdom raised its top tax rate to fifty percent in April. That move, along with EU restrictions on borrowing by hedge funds, already prompted a number of hedge funds to emigrate to greener pastures. …Hedge fund bankers are not happy about being treated like bankers. Unlike bankers, however, they do not have to stick around and take it. “About [twenty] percent of the hedge‐fund community could leave the [United Kingdom] in the next two or three years. The feeling among the hedge‐community is there is a better place to be.” Where is that better place? Asia. Places like Singapore are attracting hedge funds… Of course, the fact that Singapore does not tax capital gains may have had something to do with its attractiveness. …So what does global competition mean for populist retribution against the money changers? Apparently it depends on the mobility of the money changes you are talking about. Big banks need government backing to be credible with depositors and counterparties, so the bankers at those institutions are going to have to stick around and take it. Smaller institutions, like hedge funds, are much more portable, and if Western governments attempt to impose banker‐like restrictions on them, they will head elsewhere. …The forces of financial capitalism can no longer be confined within the boundaries of a single nation, so regulation is not simply a matter of mustering the requisite political will. There is no shortage of anger against the bankers in the current environment, but it can only be deployed against financial intermediaries who cannot flee the regulatory wrath. …International competition in financial services regulation now serves as a check on populist retribution, but only a partial one.