The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross-Listed in the US

51 Pages Posted: 20 Jan 2006 Last revised: 4 Nov 2009

Abstract

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, http://ssrn.com/abstract=959022 and http://ssrn.com/abstract=994583, 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.

Keywords: Sarbanes-Oxley Act, corporate governance, event study, cross-listing

JEL Classification: G1, G14, G15, G18, G3, G38, K00, K2, K22, K23, N20

Suggested Citation

Litvak, Kate, The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross-Listed in the US. Journal of Corporate Finance, Vol. 13, pp. 195-228, 2007, U of Texas Law, Law and Econ Research Paper No. 55, Available at SSRN: https://ssrn.com/abstract=876624

Kate Litvak (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
3,871
Abstract Views
30,963
Rank
5,145
PlumX Metrics