On the Money: Listing is too much of a hassle

By Michael Coote

Friday 20th September 2002

High expectations have been raised for the Stock Exchange with the appointment of Mark Weldon as its boss. An entrepreneurially dynamic bourse is the expected result.

It is one thing to reform the exchange, however, and quite another to boost the number of companies that want to list on it.

Too much capital is weighted into too few listed local companies, giving a lop-sided distribution of shareholders' funds across the market. The problem reflects the small size of the economy and the relatively few companies that list.

The proposed new AX board is supposed to remedy part of this difficulty by adding more ballast to the bottom end of the market but that addition will not do anything much in the short run to multiply listings of quality mid-cap companies, which is where the glaring deficiency lies.

A potential conflict exists in aiming for more listings when the cry has gone up for more regulation.

Under Mr Weldon, the Stock Exchange has taken on a newly activist stance toward corporate miscreants, as has the Securities Commission under another fairly recent appointment, chairman Jane Diplock.

With a thrust under way for even more regulatory intervention, which the government is likely to be sympathetic to, one has to ask what would tempt more companies to list and thereby invite an increased burden of legal hazard and compliance costs.

Companies list to raise capital from the public. They could seek funds in other ways, so there must be a compelling reason to go to the sharemarket rather than choose alternatives.

The tougher the Stock Exchange gets, the harder the potential listings will look elsewhere.

However, the paucity of new listings suggests many firms might not need or want extra capital anyway, something evident from the Stock Exchanges existing boards.

One of the peculiarities of this sharemarket is that companies seem to go to great lengths to get rid of capital, principally by paying high dividends and more recently with share buybacks. The Stock Exchange gross index, which accumulates dividends and imputation credits in its calculation, shows over extended time a sharemarket that creates much more wealth than is evident in the NZSE capital index, which is calculated ex-dividend.

Companies that pay high dividends are signalling that they cannot find better use for profits in reinvestment. That indicates a fault in the economy. Some would blame the companies themselves.

One of the odder recent declarations of Treasurer Michael Cullen was his comment against cutting company tax: "The vast majority of [New Zealand] profits are paid out if you lower the tax rate, more profits will be paid out that isn't going to do much for economic growth."

In Dr Cullen's view, a lower rate of company tax would favour demand and not business investment. Setting aside his strange opinion that increased demand does not increase investment, Dr Cullen does not appear to be applying his intellect to the question of why local firms do pay high dividends rather than reinvest in themselves, or why it is that recipients of those dividends do not appear to be reallocating them to further growth opportunities.

Companies and shareholders are sending him a message he does not appear to recognise.

There may in fact be a link between shortage of Stock Exchange listings and high dividend policies.

That link could be common lack of ability of firms listed or otherwise to produce a better rate of return on capital invested in a low growth, low productivity economy.

But then there are certain messages that bring out selective deafness.

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