September 21, 2007

Economists recommend steps to enhance U.S. global competitiveness

John McConnell
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The recommendations, designed to help U.S. markets become more attractive to investors worldwide, are part of a report from the Financial Economists Roundtable, a group of senior financial economists who have made significant contributions to the finance literature.

"We reviewed reports from other industry and academic leaders that said the United States is losing its competitive position and saw the need to make recommendations for improvement," said John J. McConnell, a member of the roundtable and Purdue's Emanuel T. Weiler Distinguished Professor of Management.

"We first concluded that the evidence is ambiguous, and that there are many factors that influence our global standing. But a constant focus of those claims is that the United States is hampering progress in markets with onerous regulations. We felt it was important to come up with recommendations to make those laws more equitable to both the companies and the investors by making global capital markets more efficient."

The result was a statement called "The International Competitiveness of U.S. Capital Markets," which made four policy recommendations that reflect a consensus among the majority of members who attended a July conference in San Diego.

Among the recommendations is that companies be given the option to adopt or opt out of the Sarbanes-Oxley Act of 2002, a federal law that was enacted in response to a number of major corporate and accounting scandals. The regulation provides procedures to publicly traded companies for a management assessment and audit of the effectiveness of a company's internal controls. McConnell said a small company might not be able to afford the cost to comply with the act, which may actually inhibit its long-term growth.

"An opt-out provision of the Sarbanes-Oxley Act should make going public less burdensome for small companies and allow them to grow at their own pace rather than one mandated by what they can afford," McConnell said. "The company should be able to decide if the expense of growth is worth the relative benefits of those external controls."

Another recommendation is to allow both foreign and U.S. companies the choice of using either the International Financial Reporting Standards or the U.S. Generally Accepted Accounting Principles to report to investors. Currently, foreign firms that list in the United States must use both standards in reporting finances, which often adds prohibitive reporting and reconciliation costs.

"This would allow Indiana investors to think globally because it makes it easier for companies to trade in U.S. markets," McConnell said.

The group also made the following recommendations:

* Individuals should be made more accountable with respect to securities class action suits. If a company isn't a party to the securities transaction and doesn't benefit from the fraud, public shareholders shouldn't have to pay, either directly or indirectly through insurance premiums.

* Corporations must obtain shareholder approval to adopt a "poison pill," which is a device used by corporations to fend off hostile takeovers. Current regulations don't require input from shareholders when the management of a company is considering a response to being bought by outside sources, leaving the company at the mercy of potentially poorly performing boards and management. This provision would give shareholders the opportunity to decide on the merits of the takeover bid.

Writer: Maggie Morris, (765) 494-2432, maggiemorris@purdue.edu

Source: John McConnell, (765)  494-5910, mcconnj@purdue.edu

Purdue News Service: (765) 494-2096; purduenews@purdue.edu

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