S.O.X. and Stocks: Cross-Listing as a Substitute for Corporate Governance

Abstract

Amongst the many debates about the overall benefits and value of the Sarbanes-Oxley Act (“SOX”) and other stringent U.S. corporate governance measures, no clear consensus has been reached about their impact on foreign firms that cross-list in the U.S. This paper examines the Cumulative Abnormal Returns (“CARs”) experienced by foreign firms around their announcements regarding cross-listing on the NYSE, as well as the effects of the addition of SOX and the firms’ home country’s corporate governance levels on these CARs. I used a sample of 55 firms from 16 countries that cross-listed on the NYSE between the years 1999 and 2006 and ran an event study methodology to calculate announcement date CARs, which I then regressed on variables representing pre- and post- SOX periods and home country corporate governance measures. Analysis found that “home governance” measures significantly impact company CARs, with firms from lower-governance home countries experiencing significant positive CARs around the announcement of their cross-listing. On the other hand, there was no significant relationship between firms from high-governance home countries and CARs. Of the four factors tested as part of the home governance measure, quality of the home country’s financial regulatory system had the most significant impact on CARs. Perhaps surprisingly, the addition of SOX did not contribute significantly to cross-listing CARs. These results offer a new link in the relationship between home country conditions and cross-listing share price effects. They also provide compelling evidence suggesting that it is largely firms from lower-governance countries that receive benefits to their stock price from cross-listing and complying with the high corporate governance standards and disclosure practices of the U.S. This means that for these firms, cross-listing is acting as a substitute for increasing home country corporate governance.