: academic research
The Sarbanes Oxley Act and the Flow of International Listings
Executive Summary: The primary purpose of this academic paper is to examine the flow of foreign listings on U.S. and U.K. stock exchanges after the enactment of the Sarbanes-Oxley (SOX) Act. The authors’ research shows that SOX and other factors influence listing decisions. Half of the post-SOX Act listing decline is explained by changes like home-country attributes (geographic and cultural proximity), institutional structure (legal, political, regulatory, and financial reporting), exchange-level features (pricing premium of the exchange or growth in domestic listings), and firm-specific factors (industry, size, profitability, growth opportunities, and capital raised). After controlling for these characteristics, the authors found that SOX did have a material impact on the flow of international listings. It deterred listings for a number of small firms from developed economies, but at the same time, it attracted large, profitable firms from emerging markets.
Key Findings: The frequency of foreign listings on the NYSE and NASDAQ fell by nearly 63 percent post-SOX, a decline not fully explainable by market conditions. During the same period, the frequency of foreign listings on the London Stock Exchange (LSE) more than doubled, primarily from a seven-fold increase in listings on the LSE’s Alternative Investment Market (AIM).
Once the authors had isolated the effects of listing characteristics unrelated to SOX, they discovered that the probability of a firm listing its shares on a U.S. exchange nevertheless remains lower. However, this is a decision more typical of smaller, less profitable firms attempting to choose between the NASDAQ and the LSE’s AIM. Eventually, such firms tend to choose LES’s AIM because of the incremental cost associated with SOX compliance.
The authors also identified a small set of firms that decided to list on U.S. exchanges, despite predictions that they would list on the LSE. These larger, more profitable firms were nearly all domiciled in emerging markets with weak national institutions. Therefore, they sought the enhanced bonding and reputation benefits of a post-SOX U.S. listing.
Research Impacts: Chief financial officers, bankers, exchanges, firm management, boards of directors, and accounting standard setters.
Authors and Link to Article
Joseph D. Piotroski – University of Chicago fipiotro@ChicagoGSB.edu
Suraj Srinivasan – University of Chicago ssriniva@ChicagoGSB.edu