Regulation and Bonding: The Sarbanes-Oxley Act and the Flow of International Listings

In this paper, we examine the economic impact of the Sarbanes‐Oxley Act (SOX) by analyzing foreign listing behavior onto U.S. and U.K. stock exchanges before and after the enactment of SOX in 2002. Using a sample of all listing events onto U.S. and U.K. exchanges from 1995–2006, we develop an exchange choice model that captures firm‐level, industry‐level, exchange‐level, and country‐level listing incentives, and test whether these listing preferences changed following the enactment of SOX. After controlling for firm characteristics and other economic determinants of these firms' exchange choice, we find that the listing preferences of large foreign firms choosing between U.S. exchanges and the London Stock Exchange's (LSE) Main Market did not change following the enactment of SOX. In contrast, we find that the likelihood of a U.S. listing among small foreign firms choosing between the NASDAQ and LSE's Alternative Investment Market decreased following the enactment of SOX. The negative effect among small firms is consistent with these marginal companies being less able to absorb the incremental costs associated with SOX compliance. The screening of smaller firms with weaker governance attributes from U.S. exchanges is consistent with the heightened governance costs imposed by SOX increasing the bonding‐related benefits of a U.S. listing.     

The Effect of SOX Section 404: Costs,Earnings Quality,and Stock Prices

This paper exploits a natural quasi‐experiment to isolate the effects that were uniquely due to the Sarbanes–Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms.     

An examination of the impact of the Sarbanes–Oxley Act on the attractiveness of U.S. capital markets for foreign firms

We examine whether voluntary deregistrations after the passage of Sarbanes–Oxley Act of 2002 (SOX) were intended to benefit common shareholders by avoiding firms’ costs of complying with SOX or to protect the control rents of managers or controlling shareholders (MCOs). We find that, compared with foreign firms that maintained their SEC registrations, foreign firms that voluntarily deregistered on average had weaker corporate governance, had a significantly less negative stock market reaction when SOX was passed, and suffered a significant price decline when they announced their decision to deregister. We also find evidence indicating that the deregistrations were (to a lesser extent) motivated by firms’ compliance costs related to SOX. Taken together, our results suggest that both agency costs (that is, private benefit of control of the MCOs) and the compliance cost of SOX play a role in motivating foreign firms to withdraw from the U.S. market.     

What drives delistings of foreign firms from U.S. Exchanges?

We examine time dependency in the factors motivating delistings of foreign firms from major U.S. Exchanges over the period 1962–2006. For firms listing before Sarbanes-Oxley (SOX), we find that governance has no significant effect on delisting but after SOX, it becomes one of the main forces driving delisting. For firms whose delisting decision is most likely attributable to SOX, we find they realize low benefits from listing – they originate from countries with strong home market governance, and from listing onward realize low trading volume, analyst coverage, and make little use of capital raising. Our results suggest that SOX has had a large influence on the benefits seek from a U.S. listing, leading firms from well governed countries and low capital raising needs to delist.     

An empirical investigation of Yankee stock offerings

This paper examines the operating and investment performance of 100 foreign firms that conduct their initial public offerings (IPOs) in the U.S. (Yankee stock offerings). The uniqueness of these firms is that the U.S. IPOs are their first public equity issue in any market, including the home market. We find significant improvement in the operating performance subsequent to these U.S. IPO events and firms from countries with poor investor protection benefit more. Compared to various benchmarks, unlike the significant underperformance of IPOs documented in many countries, these firms show no significant abnormal long-run stock market performance after 1, 3, or 5 years of seasoning. The findings are consistent with signaling and selective entry hypotheses.     

Changes in risk of foreign firms listed in the U.S. following Sarbanes-Oxley

This study investigates the changes in the riskiness of foreign firms listed in the U.S. following the passage of the Sarbanes-Oxley Act (SOX), legislation aimed at calming investor fears. While capital market measures of risk increase on average over a shorter-term period, total and unsystematic risk measures decrease on average over a longer-term period. Finding longer-term decreases in these risk measures is consistent with reductions in investor uncertainty. Further cross-sectional analyses show that foreign firms considered to be less uncertain at the time of SOX passage received the greatest risk reductions in the post-SOX period. Thus, it appears that the less uncertain foreign firms especially benefited from the heightened awareness and investor focus that occurred in conjunction with the passage of SOX.     

The effect of the Sarbanes-Oxley act on non-US companies cross-listed in the US

This paper uses a natural experiment to measure market response to the adoption of the Sarbanes–Oxley Act (ʽʽSOX"). Because SOX applies to all US public companies, US-based studies have difficulty separating the effects of contemporaneous events. However, controlled analysis is available: SOX applies to some cross-listed firms (those listed on level 2 or 3), but not to others (listed on level 1 or 4). By comparing reactions of SOX-exposed foreign firms to reactions of otherwise similar SOX-unexposed foreign firms, we can test investor beliefs about the costs and benefits of SOX in a way that is not cleanly available for US-based studies. We find that stock prices of foreign firms subject to SOX declined (increased) significantly, compared to cross-listed firms not subject to SOX and to non-cross-listed firms, during key announcements indicating that SOX would (would not) fully apply to cross-listed issuers. In cross-sectional tests, high-disclosing firms and firms from high-disclosing countries experienced the strongest declines, while faster-growing companies experienced weaker declines. This evidence is consistent with the view that investors expected the Sarbanes–Oxley Act to have a net negative effect on cross-listed foreign companies, with high-disclosing and low-growth companies suffering larger net costs, and faster-growing companies suffering smaller costs, particularly when they are located in poorly governed countries.     

Foreign issuers in the U.S. PIPE market

We document that the use of private investment in public equity (PIPE) by foreign firms listed on U.S. exchanges is growing even faster than its use by U.S. firms. On average, foreign firm PIPE stock deals represent a similar proportion of the firm's market capitalization to U.S. firm PIPEs, but suffer less of a share price discount than U.S. firm PIPE issuances, a relation that is robust to consideration of exchange, deal size, share turnover and return volatility. We document that hedge funds are only small investors in foreign firm PIPEs issued in the U.S., which tend to be purchased by pensions, government funds and corporations. PIPE, in combination with the reverse merger method of going public, provides a cost-effective means for foreign firms to raise capital in the U.S. capital market.     

Do cross-listers bond to U.S. markets? An examination of earnings quality around SOX

Sarbanes–Oxley [SOX, hereafter] was expected to improve the overall quality of financial reporting. A large amount of research has documented the influence of SOX on companies' reporting behaviors and how those behaviors have impacted the capital market as a whole (Cohen et al., 2008; Engel et al., 2007; Lobo & Zhou, 2006). While the assumption is that the far-reaching regulation impacts all U.S.-listed companies, this paper considers whether SOX has had a differential impact on the earnings quality of foreign filers that cross-list on U.S. exchanges. Despite some minor exceptions, these foreign companies are expected to meet the same reporting standards as domestic U.S. companies. Using a sample of cross-listers around the enactment of SOX, the results suggest that cross-listed companies do not strictly comply with SOX. At the same time, a size-matched sample of domestic U.S. companies shows significant improvement across the same set of earnings quality measures. This differential impact raises concerns about the ability of domestic regulations to impose compliance on foreign filers. While some may believe that cross-listed companies are bonding themselves to U.S. regulations and reporting quality, the evidence in this paper suggests that foreign companies are more interested in the reputational gains associated with a listing in the U.S.     

Foreign cultures, Sarbanes–Oxley Act and cross-delisting

Using a sample of foreign firms listed in U.S. and delisting shares over the period 2000 and 2010, this paper studies the impact of Sarbanes–Oxley Act (SOX) on the cross-delisting behavior of foreign firms based on the firm characteristics, legal tradition, overall culture and degree of individualism of the country of domicile. Pre-SOX, the propensity to delist is lower for firms from countries with cultural similarities to the U.S. and higher for firms from individualistic societies. Post-SOX these trends are reversed. Consistent with the existing research we find that the delisting decision of foreign firms cross-listed in the U.S. is based on the potential gains from listing based on the growth opportunities, length of presence in the U.S. and legal regulations of the country of domicile. Out findings provide evidence of the cultural factors that impact the competitiveness of U.S. capital markets.     

The Pricing of IPOs Post-Sarbanes-Oxley

The Sarbanes-Oxley Act (SOX) imposes new requirements for firms going public. Many provisions of SOX should improve the transparency of U.S. firms going public and therefore reduce the uncertainty surrounding their valuation. We find that initial returns of initial public offerings (IPOs) in the United States have declined since SOX. Furthermore, the aftermarket performance of IPOs since SOX is significantly higher. While the expense of public reporting has increased in the United States because of SOX, the valuations of newly public firms at the time of the IPO are subject to less uncertainty and smaller aftermarket corrections.     

Bond Market Access,Credit Quality,and Capital Structure: Canadian Evidence

We examine the impact of bond market access (measured by having a credit rating) on leverage for Canadian high credit quality (HQ) and low credit quality (LQ) firms, and find that the leverage impact is more pronounced for LQ firms. The results are similar for U.S. firms. Our results are confirmed when we control for the firm's credit quality, examine the change in leverage around rating initiation, and account for the issue size effect. A similar leverage impact for Canadian and U.S. LQ firms suggests that the Canada‐U.S. bond market integration has mitigated the financial constraints for Canadian LQ firms.     

The Long‐Term Effect of the Sarbanes‐Oxley Act on Cross‐Listing Premia

This paper uses a triple difference approach to assess whether the adoption of the Sarbanes‐Oxley Act predicts long‐term changes in cross‐listing premia of affected foreign firms. I measure cross‐listing premia as the difference between the Tobin's q of a cross‐listed company and a non‐cross‐listed company from the same country matched on propensity to cross‐list (first difference). I find that average premia for firms cross‐listed on levels 2 or 3 (subject to SOX) declined in the year of SOX adoption (2002) and remained significantly below their pre‐SOX level through year‐end 2005 (second difference). Firms listed on levels 2 or 3, which are subject to SOX, experienced larger declines in premia than firms listed on levels 1 or 4, which are not subject to SOX (third difference). The estimated decline is 0.15–0.20 depending on specification. Riskier firms and firms from high‐disclosing and high‐GDP countries suffered larger post‐SOX declines. Firm size predicts smaller declines in premia in well‐governed countries. Faster‐growing firms in poorly‐governed countries experienced smaller declines in premia. The results are robust to the use of different before‐and‐after periods; the use of annual, quarterly, or monthly data; the use of individual companies' Tobin's q's instead of matched pairs, and different regression specifications. The overall evidence is consistent with the view that SOX negatively affected cross‐listed premia, and particularly hurt riskier firms and firms from well‐governed countries, while perhaps helping high‐growth firms from poorly‐governed countries. At the same time, after‐SOX, level‐23 firms continue to enjoy a substantial premium, estimated at about 0.32.     

The robustness of the Sarbanes Oxley effect on the U.S. capital market

We examine the incidence of new listings and delistings on U.S. stock exchanges and firms’ propensity to delist, as a function of general market conditions, firm fundamentals, and the costs of compliance with the Sarbanes Oxley Act (SOX). We find that both general market conditions and firm fundamentals explain the delisting incidence and firms’ delisting decisions; while SOX variables are positively associated with firms’ delisting likelihood only when general market conditions are not included in the analyses. Further analyses on the population partitioned into size quintiles suggest that the passage of SOX was not associated with an increase in the likelihood of delisting for any size quintile of firms and that the implementation of SOX section 404 is positively associated with the delisting likelihood for midsized and larger firms. Our empirical evidence is useful to regulators as they consider changes in the imposition and implementation of SOX section 404.     

Bad news does not always travel fast: evidence from Chapter 11 bankruptcy filings

This paper examines the stock price performances of 275 non‐financial, non‐utility U.S. industrial firms that continue trading on the main exchanges after filing for Chapter 11 bankruptcy between 1 October 1979 and 17 October 2005. This paper identifies a negative and statistically significant post‐bankruptcy drift that lasts for at least 6 months. This finding adds to the literature showing that the market is unable to process bad public news events in a timely manner. Further analysis suggests that the theoretical model proposed by Hong and Stein (1999) can be used to help explain this market‐pricing anomaly.     

“You Can Enter but You Cannot Leave…”: U.S. Securities Markets and Foreign Firms

Although a number of prior papers have argued the benefits to foreign firms of cross‐listing their shares in the U.S., the number of foreign firms exiting U.S. capital markets has been increasing. This has occurred despite the difficulties foreign firms face in deregistering from the Securities and Exchange Commission (SEC). This paper examines the reasons underlying this trend. One of our main findings is that the passage of the Sarbanes‐Oxley Act has reduced the net benefits of a U.S. listing and registration, particularly for smaller foreign firms with lower trading volume and stronger insider control.     

What Companies Need to Know About International Cross‐Listing

This article addresses four questions about cross‐listing by non‐U.S. companies on a U.S. stock exchange: Why do companies cross‐list? Does a U.S. listing increase firm value? If so, what are the sources of the increased valuation? And finally, how has the Sarbanes‐Oxley Act (SOX) affected the value of a U.S. listing? Both managerial surveys and academic research show that companies list in the U.S. to increase visibility and share liquidity, to broaden their shareholder base, to gain access to cheaper financing and reduce the cost of capital, and, in some cases, to implement a global business strategy. Foreign companies also typically cross‐list after periods of strong market performance and experience a positive valuation effect around the time of listing, but then underperform the market in the period after the cross‐listing. On average, cross‐listed companies exhibit higher valuations than their home‐market peers, but with significant variation based on firm characteristics: The valuation premiums are larger for smaller companies with higher past sales growth, higher ROAs, and lower financial leverage. In the long run, the companies that show a permanent increase in valuation are those that succeed in expanding their U.S. shareholder base and improving their levels of shareholder protection. Finally, the evidence suggests that SOX, while perhaps deterring some would‐be overseas listings, has not seriously eroded the net benefits of a U.S. listing.     

How Representative Are Firms That Are Cross‐Listed in the United States? An Analysis of Accounting Quality

We provide evidence on the characteristics of local generally accepted accounting principles (GAAP) earnings for firms cross‐listing on U.S. exchanges relative to a matched sample of foreign firms currently not cross‐listing in the United States to investigate whether U.S. listing is associated with differences in accounting data reported in local markets. We find that cross‐listed firms differ in terms of the time‐series properties of earnings and accruals, and the degree of association between accounting data and share prices. Cross‐listed firms appear to be less aggressive in terms of earnings management and report accounting data that are more conservative, take account of bad news in a more timely manner, and are more strongly associated with share price. Furthermore, the differences appear to result partially from changes around cross‐listing and partially from differences in accounting quality before listing. We do not observe a similar pattern for firms cross‐listed on other non‐U.S. exchanges or on the U.S. over‐the‐counter market, suggesting a unique quality to cross‐listing on U.S. exchanges.     

International Transmission of U.S. Monetary Policy Shocks: Evidence from Stock Prices

This paper analyzes intraday changes in firm‐level equity prices around interest rate announcements to assess the transmission of U.S. monetary policy to the global economy. We document that foreign firms on average are roughly as sensitive to U.S. monetary policy as U.S. firms, although we also find considerable cross‐sectional variation across firms. In particular, foreign stocks in cyclically sensitive industries show stronger responses to interest rate surprises, consistent with a demand channel of policy transmission. In addition, transmission of U.S. policy appears to be stronger to economies with fixed exchange rates. Evidence for a credit channel is weaker.     

Do Control Effectiveness Disclosures Require SOX 404(b) Internal Control Audits? A Natural Experiment with Small U.S. Public Companies

We use incremental and joint implementation of multiple SOX‐based control effectiveness disclosure and audit mandates to assess relative performance of alternatives for small U.S. public companies. Using data from several low‐ and high‐effort management disclosure and audit regimes implemented from 2003 to 2008, we find substantial and statistically significant increases in material weakness disclosure rates for small firms undergoing initial SOX 404(b) internal control audits, but find quantitatively and statistically similar increases for initial management reports of small firms exempt from such audits. As to audit cost, fees more than double for initial 404(b) audits in 2004 and remain high, while 404(b)‐exempt firms’ fees grow about 10% annually. Our results support the view that, for small firms, management internal control reports and traditional financial audits may be a cost effective disclosure alternative to full application of SOX 404(b). Also, our results suggest that, even without management reports on internal control, analysis of the cause of known accounting mistakes may yield substantial material weakness disclosures.