Regulation and Bonding: The Sarbanes‐Oxley Act and the Flow of International Listings

Joseph D. Piotroski · Suraj Srinivasan

86 citations0/0 files storedJournal of Accounting Research

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Corporate Finance and Governance Auditing, Earnings Management, Governance Finance, Markets, and Regulation

Abstract

ABSTRACT In this paper, we examine the economic impact of the Sarbanes‐Oxley Act (SOX) by analyzing foreign listing behavior onto U.S. and U.K. stock exchanges before and after the enactment of SOX in 2002. Using a sample of all listing events onto U.S. and U.K. exchanges from 1995–2006, we develop an exchange choice model that captures firm‐level, industry‐level, exchange‐level, and country‐level listing incentives, and test whether these listing preferences changed following the enactment of SOX. After controlling for firm characteristics and other economic determinants of these firms' exchange choice, we find that the listing preferences of large foreign firms choosing between U.S. exchanges and the London Stock Exchange's (LSE) Main Market did not change following the enactment of SOX. In contrast, we find that the likelihood of a U.S. listing among small foreign firms choosing between the NASDAQ and LSE's Alternative Investment Market decreased following the enactment of SOX. The negative effect among small firms is consistent with these marginal companies being less able to absorb the incremental costs associated with SOX compliance. The screening of smaller firms with weaker governance attributes from U.S. exchanges is consistent with the heightened governance costs imposed by SOX increasing the bonding‐related benefits of a U.S. listing.

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1998Law and Finance 1997Legal Determinants of External Finance 2000Investor protection and corporate governance 2002Investor Protection and Corporate Valuation 2006What Works in Securities Laws?1996Law and Finance 1997Legal Determinants of External Finance 2003Why are foreign firms listed in the U.S. worth more?

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