Why do Foreign Firms Leave U.S. Equity Markets?

Fisher College of Business Working Paper No. 2009-03-003

Charles A. Dice Center Working Paper No. 2009-3

64 Pages Posted: 13 Apr 2009  

Craig Doidge

University of Toronto - Rotman School of Management

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 4 versions of this paper

Date Written: March 2009

Abstract

This paper investigates Securities and Exchange Commission (SEC) deregistrations by foreign firms from the time the Sarbanes-Oxley Act (SOX) was passed in 2002 through 2008. We test two theories, the bonding theory and the loss of competitiveness theory, to understand why foreign firms leave U.S. equity markets and how deregistration affects their shareholders. Firms that deregister grow more slowly, need less capital, and experience poor stock return performance prior to deregistration compared to other foreign firms listed in the U.S. that do not deregister. Until the SEC adopted Exchange Act Rule 12h-6 in 2007 the deregistration process was extremely difficult for foreign firms. Easing these procedures led to a spike in deregistration activity in the second-half of 2007 that did not extend into 2008. We find that deregistrations are generally associated with adverse stock-price reactions, but these reactions are much weaker in 2007 than in other years. It is unclear whether SOX affected foreign-listed firms and deregistering firms adversely in general, but there is evidence that the smaller firms that deregistered after the adoption of Rule 12h-6 reacted more negatively to announcements that foreign firms would not be exempt from SOX. Overall, the evidence supports the bonding theory rather than the loss of competitiveness theory: foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and, when those opportunities disappear, a listing becomes less valuable to corporate insiders and they go home if they can. But when they do so, minority shareholders typically lose.

JEL Classification: G15, G18, G32, G34, G38, F30

Suggested Citation

Doidge, Craig and Karolyi, George Andrew and Stulz, René M., Why do Foreign Firms Leave U.S. Equity Markets? (March 2009). Fisher College of Business Working Paper No. 2009-03-003. Available at SSRN: https://ssrn.com/abstract=1376450 or http://dx.doi.org/10.2139/ssrn.1376450

Craig Doidge

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-8598 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/facBios/viewFac.asp?facultyID=craig.doidge

George Andrew Karolyi

Cornell University - Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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