Breaching the levee, waiting for the flood. testing beliefs about the internationalization of securities markets

In the 1970s and 1980s, the three major securities markets in New York, London, and Tokyo underwent significant regulatory shifts that lowered national barriers to entry and liberalized the markets. Popular explanations point toward technologies, economic efficiencies, foreign policy pressures, the removal of controls on international capital flows, or international competition as unleashing forces promoting liberalization and breaching the regulatory levees. Such explanations generate expectations about behavior once the international pressures are unleashed. Significant changes in overseas participants' market behavior should be observable. International competitive pressures should produce convergence in regulatory and transaction costs across markets upon one of two equilibriums-one by competitive deregulations or another by harmonization through agreement. Empirical tests produce results inconsistent with such expectations. Foreign participation does increase following the breach in the regulatory levees, but the unleashed demand cannot be described as a flood. Observable measures of market dynamics and transaction costs remain distinctive. The inconsistencies between results and expectations raise questions about explanations that emphasize increasing interdependence and international pressures as driving domestic political and economic changes.