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Using a sample of newly initiated American Depository Receipt (ADR) programs over the period 2000 and 2004, this paper examines the effect of Sarbanes-Oxley Act (SOX) on the cross-listing decision and the value consequences of cross-listing by foreign firms. We find that the passage of SOX did not significantly lower the propensity of foreign firms to cross-list their shares on U.S. financial markets. However, we show that the adoption of SOX: (i) increased (decreased) the likelihood of cross-listing by firms from countries with civil (common) law legal systems; (ii) induced firms from civil (common) law countries to cross-list their shares primarily on the OTC (exchange); and (iii) raised the value of cross-listing on the OTC making its difference from exchange market listing insignificant. Our results suggest that post-SOX, foreign firms from common law countries sought functional convergence through legal bonding by cross-listing on an exchange but were deterred by the mandated corporate restructuring as well as legal and administrative costs associated with SOX compliance and elected to cross-list in alternative global financial market venues instead. For foreign firms from civil law countries for whom functional convergence with U.S. financial markets through reputational bonding was sufficient, the strengthened corporate governance environment from SOX encouraged cross-listing on the OTC.
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 experienced larger declines in premia than firms listed on levels 1 or 4, which are not subject to SOX (third difference). At the same time, the 2002 decline overpredicts the long-term change in premia. Roughly 30-35% of the firm-level change in premium during 2002 reversed during 2003; firms with larger 2002 declines had larger increases in 2003. Riskier firms and firms from high-disclosing countries suffered larger post-SOX declines. Firm size predicts larger (smaller) declines in premia in poorly (well) governed countries. Faster growing firms in poorly (well) governed countries experienced smaller (larger) declines in premia. The results are robust to the use of different before-and-after periods; the use of annual, quarterly, or monthly data; 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.
I examine the short- and long-term impact of the 2002 Sarbanes-Oxley Act (SOX) on cross-listed foreign private issuers. Both short- and long-term test results suggest that the costs of SOX compliance significantly exceed its benefits and reduce the net benefits of cross-listings.
This paper presents empirical evidence on the effects of the Sarbanes-Oxley Act of 2002 on the value of firms and on the cross-listing choice of firms destined to three major markets in North America, Asia and Europe. We use dynamic panel data methods and treatment effects methods to find that Sarbanes-Oxley has had a negative impact on the value of firms worldwide. Our evidence indicates that Sox may have segmented markets, with fewer and more valuable firms seeking the more stringent US market; but many more lower valued firms destined to Hong Kong and Germany seeking potential signaling benefits of crosslisting.
This paper uses a natural experiment to measure market response to the adoption of the Sarbanes-Oxley Act (SOX). 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 U.S.-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 the Act 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 companies suffering larger net costs, and faster-growing companies from poorly-governed countries suffering smaller costs.In two related papers, lt;a href=rdquo;http://ssrn.com/abstract=959022rdquo;gt;http://ssrn.com/abstract=959022lt;/agt; and lt;a href=rdquo;http://ssrn.com/abstract=994583rdquo;gt; http://ssrn.com/abstract=994583lt;/agt;, I study changes in cross-listing premia during 2002 (the year when SOX was adopted), and between 2002 and 2005. In both, I find that the premia for level-23 cross-listed companies declined relative to level-14 cross-listed companies and non-cross-listed companies, consistent with this event study.
This article tests whether the Sarbanes-Oxley Act (quot;SOXquot;) affected the premium that investors are willing to pay for shares of foreign companies cross-listed in the United States. I find that from year-end 2001 (pre-SOX) to year-end 2002 (after SOX adoption), the Tobin's q and market/book ratios of foreign companies subject to SOX (cross-listed on levels 2 or 3) declined significantly, relative to Tobin's q and market/book ratios of both (i) matching non-cross-listed foreign companies from the same country, the same industry, and of similar size, and (ii) cross-listed companies from the same country that are not subject to SOX (listed on levels 1 or 4), whose Tobin's q and market/book ratios declined only slightly and increased in some specifications, compared to matching non-cross-listed companies. Thus, the premium associated with trading in the United States was roughly constant, while the premium associated with being subject to U.S. regulation declined. The biggest losers were companies that were more profitable, riskier, and smaller, companies with a higher level of pre-SOX disclosure, and companies from well-governed countries. These results are consistent with the view that investors expected SOX to have greater costs than benefits for cross-listed firms on average, especially for smaller firms and already well-governed firms.In a related paper, Kate Litvak, lt;igt;The Effect of the Sarbanes-Oxley Act on Foreign Companies Cross-Listed in the U.S.lt;/igt;, Journal of Corporate Finance, vol. 13, pp. 195-228 (2007), http://ssrn.com/abstract=876624, I conduct an event study of the reaction of level-23 cross-listed companies, and find that their prices declined during SOX-relevant event periods, relative to level-14 cross-listed companies and non-cross-listed companies.
I discuss the analysis in Piotroski and Srinivasan (2008) and how it helps to disentangle the effects of Sarbanes Oxley on observed listing patterns. Since the paper is quite thorough and reflects the comments from many workshop participants, I focus on broader issues. Further, I attempt to incorporate the gist of comments from the Journal of Accounting Research conference participants. I conclude that, while the paper provides important descriptive evidence, inherent design and measurement hurdles limit one's ability to draw strong causal inferences about the effects of SOX on cross listing decisions.
Cross-listed foreign private issuers (FPIs) experience abnormal stock returns of -10%, on average, in both the U.S. and their home markets in response to the passage and implementation of the Sarbanes-Oxley Act (SOX), whereas Pink Sheets traded FPIs that are exempt from SOX compliance are not affected. The abnormal returns are generally more negative for better governed FPIs. Further, many more cross-listed FPIs quot;go darkquot; in the U.S., i.e., voluntarily delist and deregister to avoid SEC reporting obligations, in the post-SOX period relative to the pre-SOX period. The abnormal returns at the delisting and deregistration announcements are negative in the pre-SOX period and positive in the post-SOX period, with the difference being highly significant. Taken together, the results suggest that SOX imposes excessive compliance costs on cross-listed FPIs. These findings are also consistent with the existence of legal bonding benefits and the weakening of these benefits by SOX compliance.