An Examination of the Impact of the Sarbanes-Oxley Act on Cross-Listed Foreign Private Issuers and the Legal Bonding Hypothesis

Abstract:     
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 "go dark" 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.

Number of Pages in PDF File: 59

Keywords: Sarbanes-Oxley, foreign private issuer, deregistration, corporate governance, law and finance, cross-listing, ADR

JEL Classification: G15, G18, G38

working papers series