Sarbanes Oxley Act & Foreign Firms

DOES SARBANES-OXLEY ACT CHASE AWAY FOREIGN FIRMS?

EVIDENCE FROM ADR TERMINATIONS

Dobrina Georgieva, University of St. Thomas

ABSTRACT

This paper provides empirical evidence of the impact of Sarbanes-Oxley Act of 2002 (SOX)

on the determinants of American Depositary Receipts (ADR) terminations between 2000 and 2004.The results suggest that the implementation of SOX increased the propensity of foreign firms toterminate their ADR programs and decreases the optimal duration of ADR programs. Pre-SOX,foreign firms with high Market-to-Book and high Sales Growth are less likely to terminate theirADR programs from U.S. capital markets explainable with a need to finance their growth opportunities. Post-SOX, high Market-to-Book and two years annualized sales growth firms are more likely to terminate existing ADRs and likely seek bonding with other large capital markets not subject to SOX regulations. The increased propensity of firms with high sales growth to delist after SOX is attributable to the common law legal tradition of the country of domicile. Consistent with the prediction of bonding hypothesis, firms form civil law countries need to bond with the stronger regulatory environment of US listing. The results further suggest that compared to OTC listed ADRs, exchange listed ADRs are more likely to terminate as result of the implementation of SOX.