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

Peter Hostak, Emre Karaoglu, Thomas Z. Lys, Yong George Yang
2009 Social Science Research Network  
We document that the passage of the Sarbanes-Oxley Act (SOX) coincided with an increase in voluntary delistings and significant exits of foreign firms traded as American Depository Receipts (ADRs) from US stock exchanges. We examine the extent to which these delistings 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 show that compared to foreign firms that
more » ... intained their ADRs, foreign firms which voluntarily delisted 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. Our results are robust to the market and corporate governance attributes of the home countries of the delisting firms. Taken together, our results are consistent with our hypothesis that foreign firms with weaker corporate governance delisted to avoid complying with the corporate governance mandates of SOX. We label this effect as the paradoxical unintended consequence of SOX which intended to strengthen shareholder protection.
doi:10.2139/ssrn.956020 fatcat:x7n6fw4wxvb4pppq2fdmawwz4e