In this paper, I analyse some of the policy issues concerning the formation of pan-European securities markets, as well as the regulatory responses which are discussed at EC level with reference to regulated markets and issuers disclosure. By “pan-European securities markets” I intend to refer to those regulated markets which have many intermediaries connected, via remote access, from several European countries and offer trading services with respect to securities issued by companies domiciled in several Member States. I use the same concept to indicate also the primary markets where pan-European securities offers take place. My purpose is to assess the impact of some of the reforms included in the Financial Services Action Plan on the development of pan-European (primary and secondary) markets.

EC investment services regulation is a regime in transition. Since the adoption of the Financial Services Action Plan (FSAP) in 1999, the harmonized EC investment-services regime has been undergoing a period of seismic change. This process of change has been accelerated by the presentation of the seminal Lamfalussy Report on the Regulation of European Securities Markets in February 2001. The shape of the regime which will emerge from this period is still opaque. It is likely, however, that this most recent developmental stage of EC investment-services regulation will conclude with the formation of a mature, fully-fledged system of EC investment-services market regulation. In particular, it appears that the new regime will regulate the single market in investment services considerably more aggressively than does the current regime. It is unlikely, therefore, to be characterized simply as a functional integration-device which facilitates the construction of the single market in investment services via a regulatory passport: this characterization does, however, describe the current regime, for the most part.

In the last two decades there have been many examples of co-operation between national stock exchanges in Europe. However, most of these have been cooperation on a very low scale. Starting in 2000, this pattern seems to have changed. Stock exchanges have committed themselves to “alliances”, or even “mergers”, entailing a co-operation which is far more intensive than most former examples of co-operation. In the last couple of years many such alliances have been formed, some have been dissolved, and even more have been considered.

We study the determinants of stock market development and the growing migration of capital raising, listing, and trading activity to international exchanges. Economies with better fundamentals – better legal systems, greater macro stability – have larger and more liquid markets. As fundamentals improve, however, the degree of migration to international exchanges also increases. Corporations enjoy lower costs and more liquid shares. Consequently, fully-fledged local stock exchanges become less necessary for many economies. Migration can further lead to such a reduction in domestic activity that would render a local exchange unsustainable. Therefore, the functions and forms of stock exchanges in many economies need rethinking.

An integrated financial market raises the fundamental question of how enterprises should organise themselves in order to succeed in the competition for international capital. There is strong evidence that, in the future, corporate governance, including the possibility of exercising active ownership, will be a parameter in the competitive market for capital.

A recent survey by David Hirshleifer on investor psychology and asset pricing opens with a short story describing what might have happened to asset-pricing theory, had the founding fathers of modern finance not focused on rationality as the core of their thinking about financial markets, but, instead, followed Adam Smith, Irving Fisher, John Maynard Keynes and Harry Markowitz, who thought that psychology had a large impact on the outcome of financial markets. Had this path of theorizing been taken, today there might have been an influential school at the University of Chicago advocating the Deficient Markets Hypothesis and a Stanford psychologist would have become the inventor of a prominent asset-valuation model, the so-called DAPM (Deranged Anticipation and Perception Model).