: academic research
An Examination of the Impact of the Sarbanes-Oxley Act
Executive Summary: The primary purpose of this academic paper is to examine the voluntary delistings of foreign firms traded as American Depository Receipts (ADRs) from U.S. stock exchanges, to determine if the delistings were motivated by the cost of complying with the Sarbanes-Oxley (SOX) Act or by the SOX corporate governance mandates. The authors find that the delisted firms had weaker corporate governance, but that the delistings were not motivated by SOX compliance costs.
Key Findings: The primary finding is that delisting foreign firms had poor corporate governance characteristics compared to foreign firms that decided not to delist. These characteristics included a lower percentage of independent directors, smaller boards, higher CEO ownership and lower financial reporting quality.
Second, relative to the stock prices of foreign firms with “better governance”, the share prices of firms with bad governance characteristics fell less when SOX was passed. This market reaction is consistent with investors’ belief that despite the cost of complying with SOX, shareholders of foreign firms with weaker governance would benefit economically from the SOX corporate governance mandates. The governance mandates embodied in SOX presumably guard against management’s appropriation of corporate resources.
Another key discovery is that on the delisting announcement date, a significant negative stock price response occurred in the home markets. This implies that home-market investors were disappointed that the foreign firms avoided the corporate governance improvements required by SOX.
Research Impacts: Boards of foreign firms, investors, CFOs, and standard setters
Authors and Link to Article
Peter Hostak – University of Massachusetts at Dartmouth
Emre Karaoglu – University of Southern California
Thomas Lys (correspondence author) – Northwestern University tlys@northwestern.edu
Yong (George) Yang – The Chinese University of Hong Kong
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956020#PaperDownload
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