When Financial Regulators Cooperate, Foreign Investors Benefit

When countries have limited regulatory oversight and shareholder protections, some investors may steer clear. But if regulators there cooperate and agree to share information with global counterparts, that can boost investment, research suggests.

“Our evidence is particularly relevant as regulators and investors consider adopting and expanding information-sharing and cooperation arrangements,” write University of North Carolina’s Mark Lang, Chicago Booth’s Mark G. Maffett, University of Michigan’s James D. Omartian, and University of Utah’s Roger Silvers.

The researchers analyzed the effects of the Multilateral Memorandum of Understanding, a nonbinding agreement between global securities regulators created in the wake of the 9/11 terrorist attacks. More than 100 regulators have signed the MMoU, agreeing to cooperate and share information.

The United States was one of the first countries to sign, in 2002, and in some sense the MMoU gives more influence to the US Securities and Exchange Commission. The SEC’s jurisdiction is largely limited to the US, and its primary mandate is to protect US investors and exchanges. However, the MMoU makes it easier for the SEC to enforce laws that companies cross-listed on a foreign exchange are supposed to follow.

Lang, Maffett, Omartian, and Silvers used data covering $2.2 trillion of investments across 1,232 mutual funds from 65 countries to analyze what happened after each signing country adopted the agreement. Joining the MMoU was good for cross-listed companies, they find, as funds moved money into companies that were subject to increased SEC oversight. This MMoU effect tilted holdings 5 percent toward cross-listed stocks relative to those listed on only a home country’s exchange.

While US investors put 2 percent more into cross-listed stocks, investors outside the US boosted their investment 7 percent. “The difference between US funds and non-US funds is significant, suggesting that non-US investors are the primary beneficiaries of the increase in SEC oversight accompanying the MMoU,” write the researchers.

Large institutional investors outside the US were likely seeking the protections of SEC-style oversight, the researchers surmise, noting that the effects were even stronger after a US Supreme Court decision limited the legal rights of non-US investors in US courts. The fact that non-US investors moved even more strongly into cross-listed stocks after this decision, which limited their ability to pursue private legal action, the researchers consider further indication that foreign investors sought the protections of greater oversight.

Moreover, the MMoU led to more investment in securities directly subject to SEC oversight. Investors typically increased their holdings in SEC-registered American depositary receipts, stocks that trade in the US but represent shares in a foreign company. “We find evidence of a significant increase in non-US foreign ownership of SEC-registered ADRs but no evidence of an increase in ownership of non-registered ADRs,” write the researchers.

Most of the increased holdings occurred on a country’s own stock exchange, however, providing evidence that the additional SEC oversight primarily affected non-US investors trading foreign stocks on local exchanges. The MMoU effect was particularly pronounced in countries that had previously had weak economic ties to the US and had lacked a working relationship with the SEC. And the agreement attracted long-term investors, who increased their holdings more than twice as much as short-term investors did.

Prior to the MMoU, the researchers write, regulators in different countries collaborated rarely and with difficulty—and now the International Organization of Securities Commissions is in the process of enhancing the agreement. The research findings suggest that as countries weigh what to do, they should note who benefits from additional investor protections.