Whenever crisis threatens the financial markets, voices are loud in calling for greater control. It is dubious, however, whether tighter regulation would actually offer investors better protection against losing their capital. "Economic history shows us that strictly regulated stock markets do not necessarily function better than those that are given a free hand," says historian and economist Carsten Burhop of the Max Planck Institute for Research on Collective Goods in Bonn.
Based on selected sample cases, he and two British colleagues, economist David Chambers and legal expert Brian Cheffins, have studied and compared the success of initial public offerings on the Berlin stock market and two subsections of the London stock exchange between 1900 and 1913. "We were interested in seeing whether detailed statutory regulation is a necessary precondition for successful trading in initial public offerings. The parameters we chose by which to judge success were survival rates, returns and fluctuations subsequent to flotation," as Carsten Burhop explains their approach.
In choosing the Berlin exchange, they picked a prime example of a strictly regulated market. "Following the company and securities law reforms of 1884 and 1896, public share offerings were substantially more tightly regulated and the protection afforded to external investors greatly increased." In comparison with Prussian market bureaucracy, the attitude in both sectors of the London Stock Exchange at the start of the 20th Century was distinctly laissez faire. The state largely kept its distance from affairs on the London markets. There was virtually no legislation governing share issues, and even company law offered little in the way of direct protection for small investors. "As a result the merchants who ran the London Stock Exchange were left to decide for themselves which initial public offerings were admitted to the market," Burhop adds. In addition to the main market for officially quoted companies, there was a second segment in which initial public offerings were traded over the counter in an even more liberal manner.
In comparison with the Berlin stock exchange, the researchers found that over the same period of time there were substantially more initial public offerings on the London markets, covering a far broader range of industries. On the other hand, stocks traded over the counter in London proved to be an extremely risky venture for investors. "Failures were regular events between 1900 and 1913,” they observed. "19 percent of companies went bankrupt within the first five years." Whereas on the Berlin stock exchange that was heavily regulated on Prussian principles, failures were exceptional occurrences. "They amounted to less than one percent," says Burhop. Taken on its own, the official market at the London Stock Exchange was not far behind with failure rates of three to four percent. Measured by their development over an extended period, London stocks actually performed better than their Berlin counterparts, since the average returns in London were higher than in Berlin – that is when one considers that in the faster growing German economy, share prices generally climbed more steeply. In Berlin, on the other hand, prices were more stable.
"Our findings show that a stock market cannot function entirely without rules," Burhop concludes. However, measures designed to provide investor security would appear in the long term to be bad for business. Similarly, the development in officially quoted securities on the London stock exchange has shown that markets are well able to control themselves, the researchers believe. "On the basis of our study, it is relatively unimportant whether control is exerted by statute and by a state commissioner as in Berlin, or by knowledgeable merchants as on one of the two London market segments."Contact
Max Planck Institute for Research on Collective Goods
Dr. Carsten Burhop | EurekAlert!
Blockchain Set to Transform the Financial Services Market
28.09.2016 | HHL Leipzig Graduate School of Management
Paper or plastic?
08.07.2016 | University of Toronto
Researchers from the Institute for Quantum Computing (IQC) at the University of Waterloo led the development of a new extensible wiring technique capable of controlling superconducting quantum bits, representing a significant step towards to the realization of a scalable quantum computer.
"The quantum socket is a wiring method that uses three-dimensional wires based on spring-loaded pins to address individual qubits," said Jeremy Béjanin, a PhD...
In a paper in Scientific Reports, a research team at Worcester Polytechnic Institute describes a novel light-activated phenomenon that could become the basis for applications as diverse as microscopic robotic grippers and more efficient solar cells.
A research team at Worcester Polytechnic Institute (WPI) has developed a revolutionary, light-activated semiconductor nanocomposite material that can be used...
By forcefully embedding two silicon atoms in a diamond matrix, Sandia researchers have demonstrated for the first time on a single chip all the components needed to create a quantum bridge to link quantum computers together.
"People have already built small quantum computers," says Sandia researcher Ryan Camacho. "Maybe the first useful one won't be a single giant quantum computer...
COMPAMED has become the leading international marketplace for suppliers of medical manufacturing. The trade fair, which takes place every November and is co-located to MEDICA in Dusseldorf, has been steadily growing over the past years and shows that medical technology remains a rapidly growing market.
In 2016, the joint pavilion by the IVAM Microtechnology Network, the Product Market “High-tech for Medical Devices”, will be located in Hall 8a again and will...
'Ferroelectric' materials can switch between different states of electrical polarization in response to an external electric field. This flexibility means they show promise for many applications, for example in electronic devices and computer memory. Current ferroelectric materials are highly valued for their thermal and chemical stability and rapid electro-mechanical responses, but creating a material that is scalable down to the tiny sizes needed for technologies like silicon-based semiconductors (Si-based CMOS) has proven challenging.
Now, Hiroshi Funakubo and co-workers at the Tokyo Institute of Technology, in collaboration with researchers across Japan, have conducted experiments to...
14.10.2016 | Event News
14.10.2016 | Event News
12.10.2016 | Event News
21.10.2016 | Health and Medicine
21.10.2016 | Information Technology
21.10.2016 | Materials Sciences