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An Examination of the Impact of the Sarbanes-Oxley Act on the Attractiveness of US Capital Markets for Foreign Firms
Peter Hostak, University of Massachusetts at Dartmouth
Emre Karaoglu, University of Southern California
Thomas Lys, Northwestern University
Yong Yang, The Chinese University of Hong Kong
ABSTRACT. We document that the passage of the Sarbanes-Oxley Act (SOX) coincided with an increase in voluntary delistings of foreign firms traded as American Depository Receipts (ADRs) from the US. 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 maintained their ADRs, foreign firms which voluntarily delisted have weaker corporate governance, had a less negative stock market reaction when SOX was passed, and suffered a significant price decline when they announced their intention to delist. Results are consistent with our hypothesis that foreign firms with weaker corporate governance delisted to avoid complying with the corporate governance mandates of SOX. In contrast, our evidence is not consistent with the delistings being motivated by firms’ compliance costs with SOX.
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