Alternative Methods of Convergence Toward U.S. Market and Legal Regulations : Cross-Listing vs. Merging with U.S. Bidders

Non-U.S. firms have two options to converge toward U.S. capital market and legal regulations - to cross-list in the U.S. or to agree to be acquired by a U.S. bidder. We show that companies that have lower growth opportunities, are more capital intensive, and seek bonding benefits through compliance with U.S. exchange (rather than OTC market) requirements are more likely to be acquired, and that firms from civil law countries tend to cross-list. We document that the adoption of Sarbanes-Oxley Act of 2002 (SOX) led to an increase in the propensity to be acquired for firms from civil law countries, and to a greater rate of cross-listings for capital intensive firms from common law countries and for firms from countries with strong protection of investor rights. We also show that Market-to-Book values of non-U.S. firms following cross-listing in the U.S. tend to be lower when these firms were expected to be acquired. Similarly, both non-U.S. targets and U.S. bidders experience lower abnormal returns in acquisitions involving targets expected to cross-list. Our results imply the existence of optimal convergence choices of non-U.S. firms. In addition, the adoption of SOX appears to have changed some determinants of these choices due to shift in benefits and costs of compliance with U.S. regulations