American Corporate Reform Abroad: Sarbanes-Oxley and the Foreign Private Issuer

Abstract

This article addresses the potential impact of the Sarbanes-Oxley Act on the willingness of foreign private issuers to cross-list in the U.S. The article suggests that although the Act appears to increase somewhat the costs of entering the U.S. markets, it may have very little impact on cross listing. In part, this is because cross-listing issuers are quite large and are thus better able to bear the costs that the Act imposes. At the same time, other costs of the Act (such as increased liability risk) may be overstated. Foreign issuers may be willing to bear any increased cost because of the substantial benefits they appear to obtain from cross listing. By cross listing, foreign issuers gain visibility, prestige, and are able to access more readily U.S. capital markets. By voluntarily submitting to U.S. disclosure requirements and the threat of SEC enforcement and private litigation, firms appear to send credible signals that they will protect minority shareholder interests and will not extract private benefits of control. Recent empirical studies suggest that this signal is most valuable for high growth companies with large controlling shareholders that seek to expand by raising equity capital or through acquisitions. Such firms appear to significantly lower their cost of capital by cross listing. Indeed, it is possible that certain provisions of Sarbanes-Oxley (such as executive certification) could even increase the benefits of a U.S. listing by strengthens the bond or signal that comes with cross listing. Even without such an increase, however, there are currently no close substitutes for obtaining these benefits, which means that the demand for a U.S. listing may be relatively inelastic and we may observe little impact on U.S. listings. A substantial decline among issuers that currently cross list is similarly unlikely. While a foreign private issuer may easily choose to enter the U.S. regulatory system, it is quite time-consuming and expensive for that same issuer to exit the system. Because the costs of opting out of the U.S. markets are likely much higher than the costs of complying with the Act, it seems unlikely that many firms will choose to exit from the U.S. markets.