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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.
Abstract: INTRODUCTION: The overlying theme of my research project is investigating the implications of Sarbanes-Oxley (SOX) Act for U.S. foreign relations since its release in 2002. To clarify the focus of this project, I will be concentrating on the requirement under SOX Sections 102 and 106 that stipulate no public accounting firm may issue or prepare an audit report for any public company without registering with the Public Company Accounting Oversight Board (PCAOB). This requirement impacts both U.S. and foreign public accounting firms alike. Furthermore, it has impacted the United States' foreign relations with countries throughout the world and will continue to dominate accounting agenda as the business world diverges away from a strictly domestic perspective into an all-encompassing international affair. RATIONALE: The rationale behind this project is that the PCAOB registration requires all PCAOB registrants to comply with the rules and regulations set forth by the Board regardless of nationality. Consequently, the PCAOB will face a series of obstacles imposing its regulations and subsequent Board actions on foreign firms. This includes enforcing SOX in international jurisdictions, addressing conflicting international accounting standards, political and economic instability, and general backlash toward the United States. The steady decline in foreign companies listing on the U.S. capital market since SOX was released is one example of the economic backlash the U.S. has experienced. METHODOLOGY: My research relies upon documentary analysis conducted on documents collected from trusted academic sources. I examined the congressional hearings on Sarbanes-Oxley prior to its acceptance, PCAOB standards and interpretations, U.S. Department of State releases, and numerous scholarly and academic journals, covering topics in accounting, law, politics and diplomacy. After I collected a sufficient amount of documents, I conducted an in-depth analysis on the source content and extrapolated evidence in support of my investigation. PROPOSED FINDINGS: The strong negative international reaction towards SOX and its implications for foreign accounting firms is a major problem for the U.S. that must be addressed. By requiring foreign registrants' compliance with PCAOB regulations, the U.S. is threatening the sovereignty of foreign nations around the world and tarnishing its image abroad. I believe that the U.S. will need to do one of the following in the near future: 1) Develop a system that evaluates the integrity of foreign oversight systems and accept those nations with an appropriate system as equivalent to the U.S. system, or 2) Work in conjunction with foreign nations to devise an international professional oversight system. Similar to the difficulties faced by the International Accounting Standards Board (IASB), it is unlikely that an international oversight board will be successful. As a result, the PCAOB should work to devise a method to evaluate existing foreign oversight systems and honor those systems when appropriate. If the U.S. does not respond to international concerns over SOX, foreign company membership on the U.S. capital market will continue to decline and the U.S. will isolate itself, suffering politically, economically, and socially.

America's Capital Markets

United States. Congress. House. Committee on Financial Services. Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises

Published: 2006

Total Pages: 292


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The Sarbannes-Oxley Act (SOX) is a mandatory requirement for all listed corporations in the US, whether foreign or not. Compliance is not an option. Other countries are developing similar legislation so the books value is international in scope. SOX is a hot topic and the effects are just beginning to be felt world-wide. This new book goes beyond the implementation phase of SOX and looks at the reaction to the Act in terms of costs, benefits and business impacts. This book is for Senior Managers in the Business and Financial/Accounting Communities who want/need to know what the reaction of business and government is to the SOX legislation, what it is costing and how the effects are penetrating through the business environment.Mike Holt presents a comprehensive review of the impact that Sarbanes-Oxley legislation has had on business, the financial community, governments and the public since its inception in 2002. The Sarbanes-Oxley Act has been somewhat successful, but not completely and the cost (well over a trillion dollars) might be considered too high a price to pay for the gains. This book takes a hard look at the costs, benefits and other impacts as well as at what influential and prominent financial, government and business leaders think about it now.* International in scope and content and including interviews with prominent business leaders, CEOs and CFOs of large and small corporations.* Compliance with The Sarbanes-Oxley Act is now mandatory for every listed US corporation and overseas corporations listed on US stock markets.* Covers the reaction of business and government to this legislation, what it is costing and how the effects are penetrating through the business environment.
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.
As U.S. corporations progressively move into international markets, many are confronting foreign regulations, which seem to conflict with those governing operations in the U.S, and the Sarbanes-Oxley Act (“Sarbanes-Oxley”) is arguably the legislation presenting the most challenges to publicly traded organizations. Sarbanes-Oxley was hurriedly enacted by Congress to restore investor confidence and curb various corporate excesses after the blight of accounting irregularities and financial turmoil which shook the U.S. corporate landscape and eventually engulfed industry heavyweights such as Enron, WorldCom, Global Crossing or Adelphia. Sarbanes-Oxley was described by President Bush as the “most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt.” However, others have been less than thrilled with the heavy burdens imposed by the Act and its extraterritorial impact - that is, when one country imposes its laws on persons operating outside its territory - since this measure is perceived as imposing substantial, and hidden, costs on international commerce and industry, while creating new conflicts between jurisdictions. Although Sarbanes-Oxley was only intended to address domestic concerns, the importance of U.S. capital markets in the global economy unfortunately resulted in the Act possessing international “spill-over” effects. This note examines how Sarbanes-Oxley fits within the extraterritorial framework of U.S. securities regulation. Part I provides a brief summary of the bases of extraterritorial application of Sarbanes-Oxley and U.S. securities law. Part II explores the territorial reach of previous U.S. securities law to determine whether Sarbanes-Oxley's extraterritorial scope is really a departure from previous regulations or not. Finally, Part III analyzes the extraterritorial nature of Sarbanes-Oxley and how its scope diverge from traditional securities regulations. This paper concludes that Sarbanes-Oxley does not actually expand the territorial scope of securities law, but that its regulation of corporate governance is a significant departure from traditional methods of securities regulation.
Demand for international capital increased with widespread privatization efforts in the 1980s and 1990s stemming from the collapse of Communism in the former Soviet Union and Eastern Europe and from economic reform in China, Latin America, and Southeast Asia. The Sarbanes-Oxley Act, perceived as the most important piece of legislation affecting public companies since the securities acts of the l930s, was enacted in the wake of several public companies and seeks to protect investors by improving corporate disclosures made pursuant to the securities laws. Unlike securities legislation and regulation in the recent past that accommodated or exempted foreign private issuers, the Act largely ignores the variations of foreign securities laws and extends the reach of U.S. law into many aspects of the internal affairs and governance regimes of foreign firms and their auditors. With the passage of the Act, fund sourcing cost-benefit analysis has therefore changed for foreign firms seeking access to U.S. capital markets. The costs associated with a U.S. listing may now seem disproportionate to the benefits. Aspects of this new cost benefit trade off and the implications for international standard setting and convergence are examined in this paper.
In response to the dramatic fall of corporate icons such as Enron and other U.S. companies, Congress promulgated the Sarbanes-Oxley Act of 2002 (quot;SOXquot;). In doing so, Congress triggered a chain reaction that has negatively impacted U.S. equity markets and changed the face of capital raising throughout the world. SOX has not only taxed U.S. businesses it has tarnished the face of U.S. equity markets. This paper demonstrates through a statistical analysis of global IPO data that the U.S. equity markets have indeed suffered from the implementation of SOX. In addition, this paper found a palpable increase in non-domestic capital raising in locations such as London and Hong Kong. This paper further isolated the role of Chinese IPOs in the global IPO market. Jockeying for Chinese IPOs has increased the competitiveness of the foreign IPO market and raised the stakes in regulation of exchanges. SOX has reduced demand for U.S. equity market participation by foreign companies and threatens the competitiveness of U.S. markets. U.S. capital markets no longer dominate the foreign IPO arena. Regional exchanges have grown in market capitalization and reduced the importance of the U.S. markets. Foreign companies seeking to raise capital should be aware of the shift in the global capital markets but also note the advantages of offering securities on foreign exchanges despite the regulatory hurdles. Finally, this paper acknowledges the upswing in regulatory efforts in the U.S. markets and offers an alternative path to regulation in its current form that may partially restore the attraction of U.S. markets to foreign issuers.[White paper dated as of Nov. 2006]NOTE: Published version: Duquesne Business Law Journal vol. 9 p. 126 (2007). My follow-up to this paper analyzing additional IPO data, etc was cut short by the credit crunch.
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.
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.