There is ample evidence of the decline of the stock market in the UK, and the pattern has been widely remarked upon. Less well known is that, along several dimensions, Canadian equity markets are holding their own in various respects. Perhaps, then, Canada can provide guidance for those concerned the stock market in the UK is on the path to oblivion. We explore this possibility in our recent working paper, and ultimately caution that that borrowing policies on a cross-border basis to fortify equity markets should be done with considerable care.
Concerns about equity markets being in retreat in the UK have, since the early 2020s, prompted a series of reforms intended to correct matters. While various claims have also been made that the public company is in jeopardy in Canada, regulatory change designed to bolster Canadian stock markets has been modest. One reason is that policymakers have devoted considerable attention to a thus far unsuccessful effort to convert securities law in Canada from a provincial to a federal affair.
Another reason why regulatory changes designed to bolster equity markets have been less ambitious in Canada than in Britain is that the evidence in favour of decline is not as clear cut. For instance, consistent with historical patterns, Canada currently has the highest number of listed companies per capita in the world. Also, while the number of operating companies listed on the Toronto Stock Exchange, known as the TSX, has fallen significantly since the mid-2000s, the size of companies traded on Canada’s premier ‘senior’ stock market has grown substantially, and the number of firms traded on Canada’s junior markets has held steady.
A student of British equity markets might surmise, given evidence of Canadian stock market resilience, that Canada could provide beneficial lessons for those seeking to bolster the UK stock market. That would be a fair inference to draw. Context is required, however. Canadian equity markets have various idiosyncratic features, at least in relation to Britain, that UK policymakers might not be keen (or able) to replicate.
One Canadian stock market idiosyncrasy is the type of firms traded. This varies depending on the stock exchange involved. A constant, however, is the prevalence of mining companies, which feature particularly prominently on the TSX’s junior market, the TSXV. Cannabis firms are a fixture on the Canadian Stock Exchange (CSE), established in 2003 to provide an alternative to the TSXV, and CBOE Canada, the ambition of which has been to challenge the TSX’s senior market predominance.
The size of publicly traded companies, or more accurately the lack thereof, is another noticeable feature of Canadian stock markets. The average market capitalization of a company listed on the London Stock Exchange’s Main Market is nearly four times the equivalent figure for the TSX. The trend is similar with Canada’s and Britain’s junior markets. A related pattern is a prevalence of public company ‘zombies’ that have performed poorly over a long period of time without exiting from the stock market. Highly marginal firms can remain publicly traded partly because Canadian stock market officials have proved reluctant to exile such firms from public markets.
A penchant for scandal is a final Canadian stock market feature which needs to be taken into account to put evidence of Canada’s resilient equity markets into proper context. Scandals were a regular occurrence with the Vancouver Stock Exchange (VSE), a freewheeling, speculative stock market which ceased to operate at the turn of the 21st century due to a reorganisation of Canadian junior markets that culminated in the establishment of the TSXV. A CSE-centred cannabis stock market boom in the late 2010s where insiders cashed out at inflated values at the expense of cannabis savvy but financially naïve private investors indicates old habits die hard.
History does much to explain the particular features of Canadian equity markets. When Ontario tightened stock market regulation in the mid-1960s, junior mining companies moved wholesale to the lightly regulated VSE. While the VSE ceased operations as the 1990s drew to a close, the prevalence of mining companies on Canadian stock markets continues, and Vancouver remains a Canadian mining hub.
Reputedly lax regulation is another source of continuity. VSE listing standards were derisory and listing requirements for small companies on Canada’s junior markets remain strikingly hospitable. It is an open question whether the ease with which companies can list bolsters or hinders Canadian equity markets. Regardless, the future of junior markets in Canada is murky.
Institutional investors largely steer clear of Canadian junior markets, meaning retail investors owning shares directly constitute the main source of demand. There has been a sufficient appetite for equities from this quarter to sustain junior markets in Canada for over a century. Things could be changing, however. Tax breaks, in the form of what are known as flow-through shares, are a shaky buy-side foundation, given that such shares have produced lacklustre returns for investors even after factoring in the tax benefits involved. Also, Canadian retail investors are retreating as a group from riskier investments as they start reaching retirement age. Younger adventurous investors are not filling the gap in demand for junior market shares because they have options available to them now their speculative predecessors lacked, such as highly leveraged ETFs, crypto products and ‘meme’ stocks popularized on social media.
Once noteworthy idiosyncrasies of Canadian equity markets are borne in mind, the extent to which Britain can borrow beneficially from Canada to bolster the status of the publicly traded company becomes open to question. What lessons might the UK draw from Canada?
- Closely mimicking Canadian stock market arrangements will not be feasible, at least with respect to the mix of companies traded on the stock market. Cannabis firms cannot gain a foothold in the UK with legalisation not being on the horizon, and a Canadian-style stock market tilt in favour of mining seems unrealistic in Britain given that the industry is a markedly less important part of the economy than it is in Canada.
- It is doubtful whether the UK would want to mimic Canada’s flow-through shares model to bolster stock market investment, given mediocre returns for investors, and given that the scheme costs Canada’s federal government substantial sums in foregone tax revenue.
- While retail investors comfortable with buying shares in risky, fledgling companies have traditionally fortified junior markets in Canada, private investors are unlikely to rescue the stock market in the UK because they now own only a small fraction of the shares of British public companies and generally think of the stock market as an unattractively high-risk investment proposition.
- Even assuming there was potentially sufficient investor demand, for Britain deregulating stock exchange rules along Canadian lines could be a risky strategy because this could attract high-risk listings susceptible to scandals that could discredit stock market investment at a time when UK equity markets are already fragile.
To the extent that policymakers want to bolster equity markets in their own jurisdictions, a logical strategy will be to identify policies that have been successful elsewhere and borrow accordingly. Our paper’s analysis of Canada and the UK indicates that executing this strategy may well be more challenging than might be anticipated.
The authors’ working paper can be accessed here.
Brian R. Cheffins is the SJ Berwin Professor of Corporate Law at the University of Cambridge.
Bobby V. Reddy is the Professor of Corporate Law and Governance at the University of Cambridge.
With the support of
