Working Paper: NBER ID: w14245
Authors: Craig Doidge; G. Andrew Karolyi; Ren M. Stulz
Abstract: This paper investigates Securities and Exchange Commission (SEC) deregistrations by foreign firms from the time the Sarbanes-Oxley Act (SOX) was passed in 2002 through 2008. We test two theories, the bonding theory and the loss of competitiveness theory, to understand why foreign firms leave U.S. equity markets and how deregistration affects their shareholders. Firms that deregister grow more slowly, need less capital, and experience poor stock return performance prior to deregistration compared to other foreign firms listed in the U.S. that do not deregister. Until the SEC adopted Exchange Act Rule 12h-6 in 2007 the deregistration process was extremely difficult for foreign firms. Easing these procedures led to a spike in deregistration activity in the second-half of 2007 that did not extend into 2008. We find that deregistrations are generally associated with adverse stock-price reactions, but these reactions are much weaker in 2007 than in other years. It is unclear whether SOX affected foreign-listed firms and deregistering firms adversely in general, but there is evidence that the smaller firms that deregistered after the adoption of Rule 12h-6 reacted more negatively to announcements that foreign firms would not be exempt from SOX. Overall, the evidence supports the bonding theory rather than the loss of competitiveness theory: foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and, when those opportunities disappear, a listing becomes less valuable to corporate insiders and they go home if they can. But when they do so, minority shareholders typically lose.
Keywords: Deregistration; Foreign Firms; U.S. Equity Markets; Sarbanes-Oxley Act
JEL Codes: F30; G15; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor growth opportunities (P17) | higher likelihood of deregistration (K16) |
| regulatory environment (G38) | impact on firm behavior (D21) |
| SEC Rule 12h6 (G18) | increase in deregistrations (L51) |
| deregistration (L51) | adverse stock price reactions (G14) |
| SOX (G38) | adverse effects on smaller firms (L25) |
| deregistration (L51) | negative consequences for minority shareholders (G34) |