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Review of Accounting Studies

Erschienen in:

01.06.2013

An examination of the impact of the Sarbanes–Oxley Act on the attractiveness of U.S. capital markets for foreign firms

verfasst von: Peter Hostak, Thomas Lys, Yong George Yang, Emre Carr

Erschienen in: Review of Accounting Studies | Ausgabe 2/2013

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Abstract

We examine whether voluntary deregistrations after the passage of Sarbanes–Oxley Act of 2002 (SOX) were intended to benefit common shareholders by avoiding firms’ costs of complying with SOX or to protect the control rents of managers or controlling shareholders (MCOs). We find that, compared with foreign firms that maintained their SEC registrations, foreign firms that voluntarily deregistered on average had weaker corporate governance, had a significantly less negative stock market reaction when SOX was passed, and suffered a significant price decline when they announced their decision to deregister. We also find evidence indicating that the deregistrations were (to a lesser extent) motivated by firms’ compliance costs related to SOX. Taken together, our results suggest that both agency costs (that is, private benefit of control of the MCOs) and the compliance cost of SOX play a role in motivating foreign firms to withdraw from the U.S. market.

Vorheriger Artikel Detailed management earnings forecasts: do analysts listen?

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See, for example, the opening statement of Candice Miller, chairman of House Government Reform Subcommittee on Regulatory Affairs, April 5, 2006.

We use “delisting” and “deregistration” interchangeably when the distinction is not consequential. Typically, delisting comes first and conveys the foreign firm’s intention to “deregister.”

While Marosi and Massoud (2008) indeed consider two firm-level variables: insider holding (“closely held shares” in Worldscope) and holdings by U.S. institutional investors, the noisy construct of these two variables as proxies for corporate governance renders the interpretation of the results difficult. For example, the holdings by U.S. institutional investors can be interpreted as a proxy for the size of the U.S. shareholder base, which likely also measures difficulty in deregistration. We particularly include the size of the ADR program to control for this effect.

The regulatory and disclosure requirements for the issuance of Level II and III ADRs are very similar except that Level III ADRs are required to file an initial registration statement.

For example, the SEC has created a “tailored exemption” to accommodate home country regulations that would form audit committees equivalent in independence to that required under the SOX. One such example is that German firms are allowed to include nonmanagement employees on their audit committee with these employees exempted from the independence requirement.

The requirement to have a majority of independent directors was introduced by the NYSE and NASDAQ contemporaneously with the passage of SOX.

For example, Ricardo Salinas Pliego, the controlling shareholder of the Mexican firms TV Azteca and Electra, delisted the firms to avoid prosecution by the SEC under SOX (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azhU4GIBKaPI).

For example, Vivendi (delisted in 2006) had been the target of a high profile shareholder lawsuit in the U.S. in 2002 and “legal experts said the U.S. agencies are likely to move more swiftly and seek stiffer penalties if they press charges than their French counterparts who were conducting their own criminal and civil probes.” (Grover and Matlack, Businessweek, November 18, 2002). In addition, see Sect. 3 for more detailed discussion of the delisting reasons that have been claimed by delisting firms.

These three banks sponsor more than 90 % of ADRs in the U.S.

Even though SOX was signed into law on July 30, 2002, the debate about the impending legislation began in early 2002 in the wake of Enron and WorldCom bankruptcies, and some firms may have delisted in anticipation of the legislation. In our empirical work, we classify all 2002 delistings into the post-SOX period. To the extent that some of these were not SOX-related, this procedure biases us against finding a SOX-related evidence for delisting.

In Sect. 4, we provide evidence that these claimed reasons bear validity.

Among the 84 deregistering firms in our final sample, 77 cross-listed in the U.S. through ADR programs, and only seven issued common shares in the U.S. Excluding those seven firms cross-listed does not change our conclusions.

These firms either directly included the phrase “Sarbanes–Oxley Act” or used such phrases as “recent increased cost of compliance and listing” or “rising costs” in their delisting announcements.

These firms discussed listing costs using whole sentences and added emphasizing words such as “disproportionate,” “unduly,” “significant,” etc.

When mentioning costs, these firms cited listing costs in the same sentence as other reasons such as low trading volume, shift of business focus, reorganizing listing exchanges without using emphasizing phrases for costs.

We extend our sample period to 2006, because the implementation deadlines for certain SOX provisions, for example, Section 404, have been extended for foreign issuers to fiscal years ending after 2007. These firms have a real option to wait until the implementation deadline. This option is valuable because both deregistration and potential re-entry after deregistration are costly. On March 21, 2007, Exchange Act Rule 12h-6 was passed to relax the condition for foreign firms to deregister.

Since most of the empirical variables are measured relative to the event year, we use a random assignment to diversify macroeconomic shocks occurring in that year, which may potentially contaminate our results. However, our results remain qualitatively the same when we use year 2002 as the “event year” for all control firms.

We treat Scandinavia, Hong Kong/Singapore, and Australia/New Zealand each as a region and match companies within each region. In addition, we match four Swedish firms with German firms and one Peruvian firm with a Brazilian firm.

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As a robustness check, we also examine the ownership controlled by the top three owners and obtain similar results.

The standardization procedure follows Patell (1976). The standard deviation of returns is estimated between June 12, 2001 and Aug. 21, 2003, excluding returns in the event periods (see Table 4, Panel A) and requiring a minimum of 50 trading days of returns.

The usefulness of this measure would be reduced if investors partially anticipated that these firms would leave the U.S. capital market and partially ignored the SOX events. However, we provide evidence inconsistent with this view (see Sect. 4.2).

We obtain similar results if we use the logarithm of market value as an alternative proxy.

In a few cases, when this information is not available, we use the percentage of foreign sales as a substitute.

In untabulated tests, we analyze the change of capital expenditure and stock return volatility from the year of deregistration to the next year to examine whether deregistering firms planned to switch to lower risk operations and hence expected lower capital needs and do not find any significant difference between deregistering and staying firms. Inclusion of these variables in the analysis does not change the tenor of our results.

Other country-level variables considered include the governance quality measures from La Porta et al. (1998), including efficiency of judiciary system, rule of law, corruption, risk of expropriation, and risk of contract repudiation, a measure of private benefits of control (PB) from Dyck and Zingales (2004), litigation risk (WINGATE97) (Wingate 1997), the importance of equity market as in Leuz et al. (2003), ownership concentration from La Porta et al. (1998), and the Anti-director Rights Index (ANTIDIR) from La Porta et al. (2006). Including a subset or all of them to construct the principal component does not change the tenor of our results.

When we exclude event 6, the cumulative abnormal returns are −0.06 % (Z = −0.42), −5.2 % (Z = −3.92), and −4.18 % (Z = −5.82) for the deregistering, the matched and the full control samples, respectively, and the difference between the deregistering firms and the matched and the full control samples are −4.5 and −3.4 %, respectively, both statistically significant at the conventional level.

The stock return impact of the delisting announcement is likely underestimated given potential information leakage. Untabulated results for the window (−60, +60) show that there is a negative price movement in the trading day window (−30, −20). However, the negative announcement returns cannot be interpreted as a manifestation of a potential general downward trend of the deregistering firms’ stock returns because we do not observe such a downward trend in a longer period after the announcement.

Analysis of daily returns in the 20 days surrounding delisting announcements shows that the CAR is significantly positive in day 1 (CAR = 0.3 %, Z = 1.82) and day 3 (CAR = 0.5 %, Z = 2.34) and significantly negative in day 4 (CAR = −0.5 %, Z = −1.97).

In untabulated tests, we find no significant delisting announcement abnormal returns for firms that voluntarily delisted from the LSE’s AIM market in 1996–2006.

We perform a similar analysis on the SOX enactment events (untabulated). As in Table 4, none of the three groups’ abnormal returns for the combined event dates are individually statistically significant. Moreover, while the differences among the groups are generally not statistically significant with one exception: the abnormal returns for Group II are significantly lower than those of Group III.

We use “positive” in quotes to reflect that this result is relative to nonderegistering firms that had a significantly negative abnormal return.

Table 7 reports the results omitting the variables LIQ, DLIQ, and DROAF1 because including them reduce the sample size by 22 (Panel A) and 28 (Panel B) observations, respectively. However, none of these three variables were significant when we included them, and the remaining results were qualitatively similar.

While we use the term “statistically significant at conventional levels” to mean at the 10 % or lower, most of our results are significant at the 5 and 1 % levels, respectively.

In untabulated tests, we examine the change of foreign sales measured over the 5 years prior to delisting and from the delisting year to the following year. Neither is significantly different between delisting firms and control firms in univariate comparison or regression analyses.

Notably, while not individually significant, DROAF1, LIQ, and DLIQ are jointly significant at the 1 % level when we estimate the full-sample-control model with a smaller sample size, results untabulated.

PRINC has a correlation (Pearson) coefficient of 0.76, 0.82, 0.95, and 0.63 with GOV_WB, MKTTOGDP, MILKEN, and COMMONLAW, respectively.

The insignificant coefficient of PRINC in the matched-control-sample model is consistent with the notion that our matching procedure is effective at controlling for country specific differences between the deregistering and the control sample.

The rationale is that, if certain global macro-economic factors confound SOX, they should also take effect in 2002. In addition, similar to the case in the U.S., the choice of the matching year is not likely to affect the results because many of the governance variables are sticky in the short run.

These values are based on the market value 6 days prior to the deregistration announcements of 63 firms with the number of shares outstanding data available for the computation of market capitalization (mean: USD 1,173 million, median: USD 130 million).

When we run a similar regression using delisting announcement returns as the dependent variable for firms delisting from the LSE, none of the explanatory variables are significant at better than the 10 % level.

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Titel: An examination of the impact of the Sarbanes–Oxley Act on the attractiveness of U.S. capital markets for foreign firms
verfasst von: Peter Hostak
Thomas Lys
Yong George Yang
Emre Carr
Publikationsdatum: 01.06.2013
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2013
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-013-9222-2

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