An examination of the impact of the Sarbanes–Oxley Act on the attractiveness of U.S. capital markets for foreign firms
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We examine whether voluntary deregistrations after the passage of Sarbanes–Oxley Act of 2002 (SOX) were intended to benefit common shareholders by avoiding firms’ costs of complying with SOX or to protect the control rents of managers or controlling shareholders (MCOs). We find that, compared with foreign firms that maintained their SEC registrations, foreign firms that voluntarily deregistered on average had 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 decision to deregister. We also find evidence indicating that the deregistrations were (to a lesser extent) motivated by firms’ compliance costs related to SOX. Taken together, our results suggest that both agency costs (that is, private benefit of control of the MCOs) and the compliance cost of SOX play a role in motivating foreign firms to withdraw from the U.S. market.
KeywordsSarbanes–Oxley Act Voluntary delisting Cross-listing Corporate governance
JEL ClassificationG15 G18 G38 K22 M48
Financial supports from the Research Grants Council of the Hong Kong Special Administration Region, China (Project No. CUHK4623/06H), Charlton College of Business, and the Accounting Research Center at the Kellogg School are gratefully acknowledged. We thank Ying Cao, Peter Easton (the editor), Mark Lang, Mingyi Hung, Bin Ke, Jim McKeown, Margaret Neale, Gordon Richardson, Katherine Schipper, T. J. Wong, and especially two anonymous referees, and seminar participants at the Chinese University of Hong Kong, Northwestern University, Pennsylvania State University, Hong Kong University of Science and Technology, the Harvard University IMO Conference, and the 2007 AAA Annual Meeting for valuable comments.
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