Annex

Several facts currently characterize European capital markets, among them stand out:

1. A decline in the number of medium and large companies listed and a continuously decreasing initial public offerings relative to other competing markets.
2. A declining effective volume and number of transactions in the secondary market comparing with other markets.
3. The European capital markets are fragmented not only across national borders but also on investment and trading platforms. Hence, fragmentation affects the primary and secondary markets, and post-trading activities (clearing, settlement and custody)
4. European capital markets still present unharmonized legal, fiscal and operational rules.
5. Listed Firms are relatively small in terms of market value and non-listed firms are also comparatively small in size in many European countries and have great dependence on banks.
6. Comparatively, European markets suffer illiquidity costs, and give rise to a large dispersion in companies financing costs. Overall, this situation generates an insufficient, and sometimes inefficient risk-sharing across national borders and a reduce capital supply.

These seemingly related facts may be at the root of the delay in the comparative development of capital markets in Europe, their relatively small size, the negative impact in the increasingly necessary funding for innovation and in financing costs for companies; and in the need to have more large companies with international influence. As a result, this weakness provoke less resilience to adverse geopolitical, technological, and economic shocks and a less vibrant European economy.

The research proposal should clarify and provide rigorous academic evidence on the causes that explain the current situation and the apparently unstoppable patterns including necessarily a comparative analysis with the capital markets in the United States (US). Comparative analyses with the Asian-Pacific (APAC) markets would also be welcomed. Even more important and based on the evidence previously shown, the research must also include solid actions to be taken by European markets and authorities to become more competitive. The proposal should be focused on either the primary (IPOs, listing), the secondary (trading) or both areas of the market. Post-trading is left for future research calls. For a better understanding of our concerns, we post several indicative examples. Possible, but not limited issues are the following:

Primary Market:

• Which are the drives of increasing capital supply in the IPOs and listings of capital markets?
• How can the markets and state members channel long-term savings into capital markets to finance innovation, creativity, sustainability, and digitalization?
• Which is the role of the minimum required free-float of Europe in the declining relevance of the IPOs relative to the US?
• Which is the role of the relative limitation of the European capital markets as data-driven economies due to the inexistence of a European single access point?
• Which is the role of the lack of harmonized taxes including the withholding tax, and the Tobin tax?
• Which is the role of the limitation of cross-boarding investments due to current structural barriers and different legal and administrative rigid rules?
• Which is the role of regulation? In particular, which are the effects of doubling regulation between local and global European entities?

Secondary Market:

During the last years there have been a decreasing activity within European regulated markets. A key potential research question may deal with the current competition level through Multilateral Trading Platforms (MTFs), Systematic Internalizers (SIs), Symbiosis Finance (SFs), and the important role of OTC markets. Which is the role of these new facilities in the European markets relative to the US markets?

• Which are the main drivers for liquidity in the alternative platforms?
• Which is the role of regulation affecting high frequency traders in Europe relative to the US?
• How do the European and the US markets compare in terms market quality (spreads, depths, price discovery, etc.) since the introduction of high frequency traders? How the equilibrium between risk and return compare in both markets once high frequency trading was developed?
• Provide a comparison of market quality across different market places: Regulated Markets, MTFs, and SIs both in Europe and in the US

How is the secondary activity of limited partners (LPs) different across markets?

For both the primary and secondary markets would also be relevant to know how the macroeconomic conditions and the prospect of the economies is affecting both markets. A potentially interesting research topic would may provide research results on the two following issues:

• What do we know about Europe regarding the evidence that US’s equity markets outperformed the MSCI EAFE index (currency hedged) by an impressive 4.6% per year? However, one must be very careful when projecting this extraordinary performance into the future. Indeed, if the outstanding results were simply due to US investors willing to pay more for the same economic fundamentals, it would unlikely to find the same results in the next decades. Mean-reversion is a well-accepted characteristic of the stock markets. Any comparative analysis of performance across markets should be very careful when making recommendations exclusively based on past performance.
• Is Europe losing the race towards newest technologies? Which are the drivers that explain the differences in the existing numbers of technological driven companies between Europe and the US?

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