The Long-Term Effect of the Sarbanes-Oxley Act on Cross-Listing Premia

Authors


  • I am grateful to John Doukas (the editor), Yakov Amihud, Bernie Black, Craig Doidge, Andrew Karolyi, Mathew McCubbins, Rene Stulz, an anonymous referee, and the participants in the annual meetings of the American Law and Economics Association, Financial Management Association, Conference on Empirical Legal Studies, European Financial Management Association, and workshop participants at the McCombs School of Business, the University of California at San Diego Political Science department, and Stanford Law School. Ping Yan, Huyn Kim, and Anastasiya Farukshina provided excellent research assistance.

Abstract

This paper uses a triple difference approach to assess whether the adoption of the Sarbanes-Oxley Act predicts long-term changes in cross-listing premia of affected foreign firms. I measure cross-listing premia as the difference between the Tobin's q of a cross-listed company and a non-cross-listed company from the same country matched on propensity to cross-list (first difference). I find that average premia for firms cross-listed on levels 2 or 3 (subject to SOX) declined in the year of SOX adoption (2002) and remained significantly below their pre-SOX level through year-end 2005 (second difference). Firms listed on levels 2 or 3, which are subject to SOX, experienced larger declines in premia than firms listed on levels 1 or 4, which are not subject to SOX (third difference). The estimated decline is 0.15–0.20 depending on specification. Riskier firms and firms from high-disclosing and high-GDP countries suffered larger post-SOX declines. Firm size predicts smaller declines in premia in well-governed countries. Faster-growing firms in poorly-governed countries experienced smaller declines in premia. The results are robust to the use of different before-and-after periods; the use of annual, quarterly, or monthly data; the use of individual companies' Tobin's q's instead of matched pairs, and different regression specifications. The overall evidence is consistent with the view that SOX negatively affected cross-listed premia, and particularly hurt riskier firms and firms from well-governed countries, while perhaps helping high-growth firms from poorly-governed countries. At the same time, after-SOX, level-23 firms continue to enjoy a substantial premium, estimated at about 0.32.

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