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Dramatic drop in U.S. IPO activity can't be blamed on tougher regulations, shows Rotman finance research.

February 24, 2014

Toronto – An extensive study of initial public offerings shows dramatic changes in the IPO landscape around the world over the past two decades, including a large decrease in the importance of IPOs in the United States while IPOs became more important in other countries.  This drop in U.S. IPOs cannot be explained by stricter regulations enacted after the corporate and accounting scandals in the early part of the 2000s.

"One of the main things people point fingers at is the Sarbanes Oxley Act. We show that U.S. IPO activity became abnormally low before the Sarbanes Oxley Act was passed," said Craig Doidge, an associate professor of finance at the University of Toronto's Rotman School of Management.

"The declining IPO activity was not caused by the regulatory changes in the U.S. in the early 2000s," said Prof. Doidge, adding that further Investigation Is needed to determine why U.S. IPO dropped so dramatically.

The study looked at data for more than 33,000 IPOs from 88 different countries from January 1990 to December 2011. It found that U.S. IPO activity has "generally not kept pace" with that country's economic importance, and is particularly low among small companies.

Capital raised through IPOs outside of the U.S. increased by 65 per cent from the 1990s to the 2000s. But in the U.S., capital raised through IPOs fell by 8 per cent during that period.

Looking at the actual number of IPOs, if the U.S. was at one time "'the land of the IPO, it is no longer so by the 2000s," the study concludes.  Financial globalization has however benefited other countries, allowing them to overcome challenges to investment caused by weak domestic institutions.

Prof. Doidge co-wrote the paper with G. Andrew Karolyi of Cornell University and René M. Stulz of Ohio State University, which was recently published in the Journal of Financial Economics.

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