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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.
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.
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.
Understanding the current state of affairs and tools available in the study of international finance is increasingly important as few areas in finance can be divorced completely from international issues. International Finance reflects the new diversity of interest in international finance by bringing together a set of chapters that summarizes and synthesizes developments to date in the many and varied areas that are now viewed as having international content. The book attempts to differentiate between what is known, what is believed, and what is still being debated about international finance. The survey nature of this book involves tradeoffs that inevitably had to be made in the process given the vast footprint that constitutes international finance. No single book can cover everything. This book, however, tries to maintain a balance between the micro and macro aspects of international finance. Although each chapter is self-contained, the chapters form a logical whole that follows a logical sequence. The book is organized into five broad categories of interest: (1) exchange rates and risk management, (2) international financial markets and institutions, (3) international investing, (4) international financial management, and (5) special topics. The chapters cover market integration, financial crisis, and the links between financial markets and development in some detail as they relate to these areas. In each instance, the contributors to this book discuss developments in the field to date and explain the importance of each area to finance as a field of study. Consequently, the strategic focus of the book is both broad and narrow, depending on the reader's needs. The entire book provides a broad picture of the current state of international finance, but a reader with more focused interests will find individual chapters illuminating on specific topics.
The Sarbanes-Oxley Act of 2002, PL 107-204 described by some as the most important and far-reaching securities legislation since passage of the Securities Act of 1933, 15 USC §§ 77a et seq, and the Securities Exchange Act of 1934, 15 USC §§ 78a et seq, both of which were passed in the wake of the Stock Market Crash of 1929. The Act establishes a new Public Company Accounting Oversight Board which is to be supervised by the Securities and Exchange Commission. The Act restricts accounting firms from performing a number of other services for the companies which they audit. The Act also requires new disclosures for public companies and the officers and directors of those companies. Among the other issues affected by the new legislation are securities fraud, criminal and civil penalties for violating the securities laws and other laws, blackouts for insider trades of pension fund shares, and protections for corporate whistleblowers. This book contains important analyses on the impact of this Act.
Enterprise law represents the entire range of private contracts and public regulations governing the relationship of different capital providers. Enterprise Law comparatively analyses the way these fundamental legal frameworks complement each other in
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.
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 and/or to protect the control rents of managers or controlling shareholders (MCOs) from the corporate governance mandates of SOX. We find that, compared to foreign firms that maintained their SEC registrations, foreign firms which 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 (i.e., 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. Comparative analysis of voluntary delistings from the LSE Main Market supports the notion that SOX and its related agency costs constitute important factors in firms' decision to leave the U.S.
On March 21, 2007, the Securities and Exchange Commission (SEC) adopted Exchange Act Rule 12h-6 which makes it easier for foreign private issuers to deregister and terminate the reporting obligations associated with a listing on a major U.S. exchange. We examine the characteristics of 59 firms that immediately announced they would deregister under the new rules, their potential motivations for doing so, as well as the economic consequences of their decisions. We find that these firms experienced significantly slower growth and lower stock returns than other U.S. exchange-listed foreign firms in the years preceding the decision. There is weak evidence that firms experience negative stock returns when they announce deregistration and stronger evidence that the stock-price reaction is worse for firms with higher growth. When we examine stock-price reactions around events associated with the passage of the Sarbanes-Oxley Act (SOX), we find negative average stock-price reactions with some specifications but not others. Further, there is no evidence that deregistering firms were affected more negatively by SOX than foreign-listed firms that did not deregister. Our evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home.
In its June 2010 Morrison v. National Australia Bank ruling, the U.S. Supreme Court unexpectedly decided that key fraud-related provisions of U.S. securities laws would only apply to transactions in foreign securities that take place on U.S. exchanges. We document a statistically significant and economically large increase in the price of U.S. cross-listed foreign stocks relative to their currency-adjusted equivalent home-market shares around the decision, which we associate with the newly differentiated legal status accorded U.S. cross-listed shares by Morrison. We interpret the market's reaction to the decision as affirming that investors, both foreign and domestic, value how U.S. securities laws apply, an important element of the “bonding” hypothesis as a motive for international cross-listings.