Serving SMEs Via the Stock Exchange: Historical Lessons from the Lisbon Stock Exchange

Abstract:

The development of large companies in the western world — many being huge multinational corporations — and the sheer size of their financial needs has given an added importance to tradability, a fact that can clearly be gauged by the recently discovered “high frequency trading” (HFT) operations which are only possible with large issues. Also contributing to the importance of tradability is the recent demutualization of most exchanges during the 1990s, which turned them into for-profit organizations. In fact, large issues of shares or bonds allow economies of scale, and generate experience in listing practices and trading operations, thereby enhancing the profitability of those commercially oriented stock exchanges. Thus, small and medium enterprises (SMEs) are now much less attractive to these organizations, as compared to large enterprises (LEs), due to their inherent lack of liquidity and to the economies of scale. We discuss the barriers before SMEs, which require special accommodations to be able to raise stable funds for their development.

Keywords::

• financing firms
• Lisbon Stock Exchange
• SMEs
• stock exchanges

JEL Classification Codes::

• N20
• N24

Notes

¹ The definition of SME in the European Union is that they constitute “an independent enterprise with fewer than 250 employees and an annual turnover of not more than $40 million or net assets of not more than 27 million euro. No more than 25 percent of the company can be owned by another, non-SME organization (other than as a financial investor)” (European Commission n.d.).

² Recall the destruction to global trade brought about by the 1929 market crash and the subsequent WWII (Jones 2005).

³ Our article is one of the first outputs of an ambitious project launched in 2010 and still under development at two universities in Lisbon to characterize the Portuguese capital market in the twentieth century, as well as to understand the evolution of the domestic legal environment and the succession of political events that influenced the local capital market.

⁴ According to the Office for National Statistics of UK (n.d.), “[c]ompanies with less than 50 staff were re sponsible for 40 percent of live patents during 2000 to 2008, while large organizations accounted for 44 percent and medium-sized enterprises just 16%.”

⁵ The European Commission on Innovation and SME (European Commission n.d.).

⁶ For banks and other financial intermediaries, money is their raw input, not simply their means of payment, of measuring prices, and of accumulating capital.

⁷ Including the Portuguese ones in the beginning of the twenty-first century.

⁸ For the main factors restricting the access of SMEs to banking services, see Alina Hyz (2011).

⁹ For the effects of these aspects on the capital asset pricing model (CAPM), see Stephane Rousseau (1999, 356).

¹⁰ This is the traditional criterion demanded in most places to list a share issue in a stock exchange.

¹¹ See Edward Peter Stringham (2002) for the case of London, and Stringham (2003) for the case of Amsterdam.

¹² For example, Brazil had two large exchanges, in Sao Paulo and in Rio de Janeiro, plus several others in several federal states. Some regional exchanges started the consolidation movement in 1974 by pooling their resources, but the great step was the concentration of the entire Brazilian market in Sao Paulo during 2002.

¹³ In Germany, this is due to the federal character of the country and the important role played in this field by the different länder. The Berlin Stock Exchange even was reopened after the fall of the Berlin Wall in 1989. In Spain, it is because the four exchanges still maintain their juridical independence, while actually sharing a single trading system that offers one single integrated market.

¹⁴ Below, see the integration of Portugal into the Euronext Group.

¹⁵ The $8 billion Singapore Exchange Ltd’s (SGX) offer to buy the Australian Securities Exchange (ASX) failed in April 2011, when the Australian government rejected the offer on the grounds that “the deal would have diminished Australia’s economic and regulatory sovereignty, presented material risks and supervisory issues due to ASX’s dominance over clearing and settlement and failed to boost access to capital for Australian businesses” (Reuters on April 8, 2011). In May 2011, the $11.3 billion offer of NASDAQ and ICE (Intercontinental Exchange) to buy NYSE was rejected by U.S. antitrust regulators. In June 2011, the London Stock Exchange’s C$3.2 billion offer to buy the Toronto group of markets was rejected by the majority of shareholders of the latter entity. The much heralded marriage between NYSE Euronext and Deutsch Börse groups was not approved by the European Commission in November 2011.

¹⁶ Officially, the two exchanges were not closed, but only their operations were suspended. In reality, both marke ts were closed for some years.

¹⁷ The first trading day was March 4, 1977, when two companies had their shares traded for a total quantity of 110 units.

¹⁸ The first thirty years of the twentieth century are becoming increasingly difficult to understand, as the information printed in the Daily Bulletins decreased greatly from 1926 onward.

¹⁹ Since the market closed in April 1974, and because this analysis sampled the month of December for every five years, the year 1974 could not be included.

²⁰ This higher multiplier for smaller firms is in accordance with the frequently observed excess return obtained for small and micro-companies. In fact, the added risks due to the smaller size — more variability of prices — and the liquidity premium for smaller issues justify a spread on top of the return obtained for large/mature corporations.

²¹ The ship-repair LISNAVE, the BPA bank, and Electric Utilities.

²² According to a 1930 average consumer price index, inflation increased prices by 2.32 in December 1973.

²³ Actually the government authorized the Lisbon Exchange to resume operations (only) in bonds in January 1976 in order to bring tradability to the increasing volumes of public debt being issued at the time.

²⁴ This Code (Código do Mercado de Valores Mobiliários), best known as Código Sapateiro after the name of its main author, was published with Decree-Law 142-A/91 on April 10, 1991.

²⁵ See a semi-annual survey conducted by the Portuguese Statistics Office, “Inquérito de Conjuntura ao Investimento,” in which resident corporations were asked about how they planned to finance future investments, where bonds and shares formed less than 1.0 percent of their total funding mechanisms.

²⁶ Regimento do Oficio de Corretor and Regulamento do serviço e operaçöes das Bolsas de fundos públicos e particulares e outros papéis de crédito, enacted by a decree on October 10, 1901.

²⁷ That minimum equity was twenty million escudos when even the Company’s Code (article n°276) defined five million escudos as the minimum equity to start a joint stock company.

²⁸ Prospectus: from article n°143 to n°173; securities tradable on an exchange: from article n°291 to n°392; public offers for sale: from article n°585 to n°606.

²⁹ Issued with the Decree-Law 486/99 on November 13, 1999

³⁰ Public offers for distribution: from article n°156 to n°172. Listing requirements: from article n°227 to n°243. Information relative to listed securities: from article n°244 to n°251.

³¹ The financial intermediaries are becoming less and less reliable, which requires more strict regulations on their activity.

³² Note that the stamp “listed” also helps in securing qick and inexpensive funds from banks and other financial intermediaries. Probably it was this double byproduct of listing — visibility and credibility — which explains the fact that, before 1974, many SMEs had their shares listed on the BVL, despite showing rather rare transactions in that market. Many of them did not even have a single transaction for months at a time, but remained listed.

³³ A multilateral trading facility (MTF) is a type of centralized market created recently in Europe to facilitate trading of securities without the burden of a compliance with previous listing requirements. An “over the counter” (OTC) market is a market where people trade with banks and other intermediaries in an opaque way.

³⁴ BOVESPA stands for “Bolsa de Valores de Sao Paulo,” the only stock exchange remaining now in Brazil from the previous seven that existed (they merged into that single one in 2000).

³⁵ Available at https://vimeo.com/19818493.

³⁶ However, Portugal was the last country to adhere to this consolidation movement, and the year 2011 also saw a number of failures of proposals to combine such markets from different geographic locations.

³⁷ “Stable funds” means equity and long-term tradable debt.

³⁸ The term “facilitators” does not necessarily mean only a smaller and more flexible exchange.

Additional information

Notes on contributors

José Rodrigues da Costa

José Rodrigues da Costa is a former invited professor of finance at Nova School of Business and Economics (Portugal) and an advisor to the Board of Management of Euronext Lisbon, the Portuguese Stock Exchange.

Maria Eugénia Mata

Maria Eugénia Mata is an associate professor at Nova School of Business and Economics. This article is a result of a three-year research project on “The Cost of Capital in Portugal,” funded by the Portuguese Science Foundation. The authors are grateful to FEUNL for rendering facility assistance, to João Silva Ferreira, Luís Catela Nunes, and Joseph Love for their comments, and to John Huffstot for English language corrections of the article. Any existing errors are the authors’ own.