An Examination of the Impact of the Sarbanes-Oxley Act on the Attractiveness of US Capital Markets for Foreign Firms

Abstract:     
We document that the passage of the Sarbanes-Oxley Act (SOX) coincided with an increase in voluntary delistings and deregistrations of foreign firms traded as American Depository Receipts (ADRs) from US stock markets. We examine the extent to which these exits were motivated by firms' costs of complying with SOX or by managers' or controlling shareholders' (MCOs) loss of control rents that resulted from corporate governance mandates of SOX. We find that compared to foreign firms that maintained their ADRs, foreign firms which voluntarily deregistered have 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 intention to delist. There is also evidence supporting the argument that the delistings were motivated by firms' (as opposed to MCOs') compliance costs related to SOX. Taken together, our results demonstrate that both the agency problem (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 US market.

JEL Classifications: G38, G34, G12, G15

Working Paper Series