In a paper entitled Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices Over Time, Craig Doidge, G. Andrew Karolyi, and I show that Sarbanes-Oxley (“SOX”) cannot be blamed for the decrease in foreign listings on the New York Stock Exchange and NASDAQ. A recent revision of the paper, posted here, provides additional supporting evidence for our conclusions. Before reviewing that additional evidence, I summarize the main results of the paper below.
A popular explanation for the decrease in foreign listings on the exchanges in New York is that the passage of SOX has made U.S. listings significantly less attractive to foreign companies–so much so, it is argued, that many listed firms would delist and deregister if it were easy to do so. (That explanation, among others, is set forth in a recent report entitled Sustaining New York’s and the US’s Global Financial Services Leadership, prepared for Senator Charles Schumer of New York.) The argument is that SOX makes a U.S. listing less advantageous because it imposes severe costs on companies and their managers, especially through the compliance requirements of Section 404. (Section 404 aims to reduce the market impact of accounting “errors” by assuring effective management control over reporting; and, in turn, creates significant legal exposure for companies as well as executives.)
For this popular explanation to be correct, it would have to be that firms that would have chosen to list in the U.S. before SOX are no longer willing to do so. Our paper shows that:
(1) Foreign listings have fallen in London as well as in New York, except for listings on the AIM exchange in London. This decrease in London listings is inconsistent with the view that SOX made London more attractive for listings in comparison with the New York exchanges.
(2) The growth in listings on the AIM exchange cannot be attributed to foreign firms choosing to list on AIM instead of in the U.S. because the typical firm listing on AIM is very small compared to firms listing on U.S. exchanges.
(3) If SOX had made it unattractive for some firms to list on exchanges in the U.S., we would expect that the characteristics of firms listing in the U.S. would have changed. They have not.
(4) Using a benchmark model which explains foreign listings in the 1990s, there is no evidence that there are fewer firms listed after SOX than we would expect had SOX not become law.
(5) Foreign firms listed on U.S. exchanges are valued more highly than comparable firms not listed on U.S. exchanges. There is no evidence that this valuation premium has changed since SOX.
Cross-listing in the U.S. has a governance benefit for foreign firms because they are subjected to U.S. laws and regulations and are monitored by U.S. capital market intermediaries. The evidence in the paper shows that cross-listing in London has no equivalent governance benefit.
The revision of the paper recently uploaded to SSRN adds three important new results:
(1) The paper shows that a listing on AIM is in no way equivalent to a listing on NASDAQ. For a subset of 88 AIM-listed firms for which detailed data could be obtained, only 25% of those firms met the NASDAQ listing criteria that could be checked. As a result, the typical firm listing on AIM is one that could not list on NASDAQ–and the typical listing on AIM does not come at the expense of NASDAQ or the NYSE.
(2) Our earlier version only estimated a benchmark model for the number of existing listings. A number of colleagues remarked that our approach ignored the possibility that firms listed in the U.S. might not have found it worthwhile to delist because deregistration was almost impossible. This criticism could not explain why London had too few listings relative to the prediction of the benchmark model for London, but it could explain why the U.S. had too many listings. The revision estimates a benchmark model for new listings. Since firms are completely free not to acquire a listing if they do not have one, the benchmark model for new listings is not subject to the criticism that applies to the model for existing listings. It turns out that there is no deficit of new listings using the benchmark model.
(3) Some colleagues wondered whether the absence of a change in the valuation premium of exchange-listed firms in the U.S. masked a decrease in the valuation premium for the firms for which the governance benefit from listing in the U.S. was the least valuable–namely, firms from countries with laws and regulations that provide high levels of investor protection. We find that this is not the case. There is no evidence that the valuation premium has fallen for firms from such countries.
The revised version of the paper is available for download here.