The Role of Institutional and Retail Shareholders in Canadian Capital Markets

Abstract

In recent years, the growth of the institutional portfolio (ie., funds managed by mutual funds, insurance companies, banks, trust and loan companies, etc.) has been truly astonishing. In this article, Professor MacIntosh argues that this growth has important implications for the manner in which Canadian capital markets are regulated. In particular, institutional shareholders tend to be better monitors of corporate managers than retail shareholders. Institutional monitoring has been impeded by a number of features of the regulatory landscape. Professor MacIntosh makes a number of recommendations for changes to corporate and securities laws. Contrary to the fears expressed by some, the decline of the retail investor and the rise of the institutional investor should be accompanied by enhanced market liquidity and market efficiency. Regulatory policies premised on assuring the continued market presence of retail investors lack a solid theoretical or empirical footing. Professor MacIntosh also notes that market institutionalization has been and will continue to be associated with growth in the so-called "exempt" market. This will exert a brake on the extent to which regulators can regulate non-exempt market transactions, since higher levels of regulation will only drive issuers and investors into exempt markets or to other locales. Finally, Professor MacIntosh notes that the burgeoning derivatives markets present a challenge for regulators. Properly managed, the purchase of derivative securities can greatly reduce portfolio risk. Improperly managed, however, derivatives can greatly increase risk. Professor MacIntosh argues that most buyers in derivatives markets are institutional, and that where such buyers dominate, a light-handed regulatory approach is indicated.