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

43 Pages Posted: 9 Jan 2007 Last revised: 8 May 2012

See all articles by Peter Hostak

Peter Hostak

University of Massachusetts Dartmouth - Charlton College of Business

Emre Karaoglu

Columbia University - Columbia Business School

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: October 30, 2009

Abstract

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 and/or to protect the control rents of managers or controlling shareholders (MCOs) from the corporate governance mandates of SOX. We find that, compared to foreign firms that maintained their SEC registrations, foreign firms which 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 (i.e., 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. Comparative analysis of voluntary delistings from the LSE Main Market supports the notion that SOX and its related agency costs constitute important factors in firms’ decision to leave the U.S.

Keywords: Sarbanes-Oxley Act, Delisting, Cross-listing

JEL Classification: G38, G34, G12, G15

Suggested Citation

Hostak, Peter and Karaoglu, Nuri and Lys, Thomas Z. and Yang, Yong George, An Examination of the Impact of the Sarbanes-Oxley Act on the Attractiveness of US Capital Markets for Foreign Firms (October 30, 2009). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=956020 or http://dx.doi.org/10.2139/ssrn.956020

Peter Hostak

University of Massachusetts Dartmouth - Charlton College of Business ( email )

285 Old Westport Road
North Dartmouth, MA 02747
United States

Nuri Karaoglu

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Thomas Z. Lys (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

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