Do Less Regulated Markets Attract Lower Quality Firms? Evidence from the London Aim Market

The paper examines competition among international capital markets in light of the apparent outperformance of the moderately regulated Alternative Investment Market (AIM), which is a growth market governed by the London Stock Exchange. The rise of AIM has sparked a debate on i) whether the U.S. capital markets may be losing their competitive edge and ii) whether financial markets should be more (or less) regulated. Recent literature diminishes such worries and concludes that the relatively more regulated U.S. stock exchanges still stand strong and any potentially outperforming exchanges – such as the London AIM market – primarily attract small firms. This study, however, shows that these small firms listing on the relatively less regulated AIM market are of at least the same quality level as firms listing in the U.S. and in continental Europe. Consistent with this result, the failure rate among AIM listed firms is the same as that of other markets. Interestingly, they also raise relatively more capital and have a higher market valuation. Overall, even though high regulation standards may appease investors, the paper questions whether a strict regulation environment will necessarily facilitate stock market prosperity