The Long-Term Effect of Sarbanes-Oxley on Cross-Listing Premia

Abstract

This paper uses a triple difference approach to assess whether the adoption of the Sarbanes-Oxley Act predicts long-term changes in cross-listing premia of affected foreign firms. I measure cross-listing premia as the difference between the Tobin's q of a cross-listed company and a non-cross-listed company from the same country matched on propensity to cross-list (first difference). I find that average premia for firms cross-listed on levels 2 or 3 (subject to SOX) declined in the year of SOX adoption (2002) and remained significantly below their pre-SOX level through year-end 2005 (second difference). Firms listed on levels 2 or 3 experienced larger declines in premia than firms listed on levels 1 or 4, which are not subject to SOX (third difference). At the same time, the 2002 decline overpredicts the long-term change in premia. Roughly 30-35% of the firm-level change in premium during 2002 reversed during 2003; firms with larger 2002 declines had larger increases in 2003. Riskier firms and firms from high-disclosing countries suffered larger post-SOX declines. Firm size predicts larger (smaller) declines in premia in poorly (well) governed countries. Faster growing firms in poorly (well) governed countries experienced smaller (larger) declines in premia. The results are robust to the use of different before-and-after periods; the use of annual, quarterly, or monthly data; and different regression specifications. The overall evidence is consistent with the view that SOX negatively affected cross-listed premia, and particularly hurt riskier firms and firms from well-governed countries, while perhaps helping high-growth firms from poorly-governed countries.

Keywords: Sarbanes-Oxley Act, cross-listing, corporate governance, cross-listing premium, bonding, securities regulation

JEL Classification: K00, K22, G3, G14, G15, G18, G34, G38