The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross-Listed in the US

This paper uses a natural experiment to measure market response to the adoption of the Sarbanes-Oxley Act (SOX). Because SOX applies to all US public companies, US-based studies have difficulty separating the effects of contemporaneous events. However, controlled analysis is available: SOX applies to some cross-listed firms (those listed on level 2 or 3), but not to others (listed on level 1 or 4). By comparing reactions of SOX-exposed foreign firms to reactions of otherwise similar SOX-unexposed foreign firms, we can test investor beliefs about the costs and benefits of SOX in a way that is not cleanly available for U.S.-based studies. We find that stock prices of foreign firms subject to SOX declined (increased) significantly, compared to cross-listed firms not subject to SOX and to non-cross-listed firms, during key announcements indicating that the Act would (would not) fully apply to cross-listed issuers. In cross-sectional tests, high-disclosing firms and firms from high-disclosing countries experienced the strongest declines, while faster-growing companies experienced weaker declines. This evidence is consistent with the view that investors expected the Sarbanes-Oxley Act to have a net negative effect on cross-listed foreign companies, with high-disclosing companies suffering larger net costs, and faster-growing companies from poorly-governed countries suffering smaller costs.In two related papers, lt;a href=rdquo;http://ssrn.com/abstract=959022rdquo;gt;http://ssrn.com/abstract=959022lt;/agt; and lt;a href=rdquo;http://ssrn.com/abstract=994583rdquo;gt; http://ssrn.com/abstract=994583lt;/agt;, I study changes in cross-listing premia during 2002 (the year when SOX was adopted), and between 2002 and 2005. In both, I find that the premia for level-23 cross-listed companies declined relative to level-14 cross-listed companies and non-cross-listed companies, consistent with this event study