Where do IPOs happen, and why?

October 15, 2007

The NY Times is asking whether NY is still the ‘capital of capital’ mentioning that, among other things, the largest mutual funds are not based in the city, the biggest securities trading floor is no longer that of the NYSE (see here about the demise of open outcry trading and here more discussion about it):

[I]n today’s burgeoning and increasingly integrated global financial markets — a vast, neural spaghetti of wires, Web sites and trading platforms — the N.Y.S.E. is clearly no longer the epicenter. Nor is New York. The largest mutual-fund complexes are in Valley Forge, Pa., Los Angeles and Boston, while trading and money management are spreading globally. Since the end of the cold war, vast pools of capital have been forming overseas, in the Swiss bank accounts of Russian oligarchs, in the Shanghai vaults of Chinese manufacturing magnates and in the coffers of funds controlled by governments in Singapore, Russia, Dubai, Qatar and Saudi Arabia that may amount to some $2.5 trillion, according to Stephen Jen, a Morgan Stanley economist.

However, as financial markets become more distributed, we should re-evaluate the connections between geographical location and capital.

One potential direction that is hinted in the NY Times story is the preferred location for IPOs (initial public offering). The article refers to the fact that nine out the ten largest out-of-country IPOs (IPOs done outside the country where the company is incorporated) in the last year were held outside the US. IPOs, of course, are the fundamental building blocks of financial markets as through them new stocks enter the market. Knowing that NY is the traditional location for IPOs, we can pretty much equate US with NY. The meaning of this figure is that NY does not attract to the same degree it used to the types of people and institutions that perform IPOs. Instead, the story tells us, new urban ‘financial-attraction’ centres are rising (at least as far as IPOs go). Hong Kong seems to be one of New York’s major rivals, as are some European cities.    

So, what are the conditions that attract IPOs to a particular urban centre? The immediate conceptual candidates are human capital (experienced underwriters, for example), institutions, liquid capital and, inevitably, a social network that binds these ingredients together effectively. All of this may sound fairly basic to a sociologist, but in spite of the fact that there is considerable research about urban financial centres, to best of my knowledge the crucial element of IPOs has not been studied empirically from a sociological perspective. Having said that, a paper by Richard Florida analyses the demographic conditions that induce creativity among urban populations and thus may help to conceptualise the question of where IPOs are likely to take place. It can be that one of the reasons for this relative lack of academic attention is the fact that to understand what makes IPOs happen, one needs to witness the inner mechanisms of the process and these are not easily accessible, as this classic ethnography-like Fortune magazine story about Microsoft’s IPO shows.

One Response to “Where do IPOs happen, and why?”

  1. danielbeunza Says:

    A very relevant — crucial — public policy issue. The question has been floating around in the US, promoted especially by orthodox economists who opposed the more rigorous regulation enacted in the US after the Enron scandals. For example, the pro-market Committee on Capital Markets Regulation (of which the Dean of my own school) flagged the dwindling share of world IPOs in Wall Street and called for more lax regulation.

    Nevertheless, one can ask whether IPOs is the true measure of financial significance, whether the crux of financial innovation lies in IPOs or in the creation of new structured products and arbitrage strategies. One interesting alternative measure of “financial centrality” has been proposed by Luigi Zingales (Chicago GSB) is the valuation premium that companies enjoy from being listed in the US. There seems to be a debate as to whether this is falling or not… See:


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