Its distinctive regulatory system has helped make the Alternative Investment Market one of the world’s leading stock markets for young growing companies, according to a report from the London School of Economics and Political Science.

The study was commissioned by the London Stock Exchange and conducted by Geoffrey Owen, senior fellow in the Department of Management, professor Julia Black, professor of Law, and Sridhar Arcot, a researcher in the Financial Markets Group of the LSE.

It reports that since 1995, 2,300 British and 400 foreign companies have come to AIM, raising a total of £49 billion, of which over 40% has been in the form of follow-on issues. The report also shows that the amount of capital raised on AIM has increased sharply in the last few years, rising from £2 billion in 2003 to £15.7 billion in 2006 and that income for the City generated by AIM is estimated to be running at around £1 billion a year, of which about half comes from non-British companies.

It also finds that the competitive strength of AIM lies partly in its distinctive regulatory system, which is tailored to the needs of smaller companies, and partly in its location within the City of London.

“The growth of AIM has been a great success for the City of London, and reflects the soundness of the regulatory regime that was put in place at the start. The character of the market has clearly changed in the last few years, with the introduction of more foreign companies and the new property and equity investment entities, and this is one of the factors that led the London Stock Exchange to formalize the rules for AIM’s Nominated Advisors and to strengthen AIM’s regulatory capacity. But the regulatory framework continues to provide ample scope for market-led innovation and flexibility, which have been the keys to AIM’s success,” said Owen.

The study also finds that AIM has matured since the collapse of the dot.com boom and now attracts a wide range of investors, but there is a need to attract more investment from the countries in which non-British companies are based. An analysis of after-market returns on new admissions since 2000 suggests that, on average, investors in new AIM companies have outperformed the wider market. It also notes that the failure rate on AIM is low, running at less than 3% in the last four years. And, with an average monthly trading volume of just over 20 million shares, liquidity in the shares of the larger AIM companies is comparable to that of similar-sized companies on the Main Market; also, the introduction of a new trading system succeeded in increasing liquidity and reducing spreads on the largest stocks.

“We welcome this incisive report from LSE. It highlights the unique qualities of AIM, including its principles-based regulatory system, which have provided investors with access to excellent returns against a backdrop of low failure rates,” said Clara Furse, chief executive of the London Stock Exchange. “AIM will continue to develop and evolve, servicing the needs of growing companies from the UK and around the world, as well as contributing to the success of the City and the wider UK economy. Whilst the report highlights increasing competition, often in the form of imitation, AIM has the credentials and momentum to continue in its role as the world’s growth market.”

“We concur with LSE’s concluding observation that the core mission of AIM is likely to remain what it has been from the start, to provide a market for small and medium-sized companies which are ambitious to grow and need capital for expansion,” Furse added.