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Why Do Foreign Firms Leave U.S. Equity Markets?

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  • Craig Doidge
  • G. Andrew Karolyi
  • René M. Stulz

Abstract

This paper investigates Securities and Exchange Commission (SEC) deregistrations by foreign firms from the time the Sarbanes-Oxley Act (SOX) was passed in 2002 through 2008. We test two theories, the bonding theory and the loss of competitiveness theory, to understand why foreign firms leave U.S. equity markets and how deregistration affects their shareholders. Firms that deregister grow more slowly, need less capital, and experience poor stock return performance prior to deregistration compared to other foreign firms listed in the U.S. that do not deregister. Until the SEC adopted Exchange Act Rule 12h-6 in 2007 the deregistration process was extremely difficult for foreign firms. Easing these procedures led to a spike in deregistration activity in the second-half of 2007 that did not extend into 2008. We find that deregistrations are generally associated with adverse stock-price reactions, but these reactions are much weaker in 2007 than in other years. It is unclear whether SOX affected foreign-listed firms and deregistering firms adversely in general, but there is evidence that the smaller firms that deregistered after the adoption of Rule 12h-6 reacted more negatively to announcements that foreign firms would not be exempt from SOX. Overall, the evidence supports the bonding theory rather than the loss of competitiveness theory: foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and, when those opportunities disappear, a listing becomes less valuable to corporate insiders and they go home if they can. But when they do so, minority shareholders typically lose.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14245.

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Date of creation: Aug 2008
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Publication status: published as "Why Do Foreign Firms Leave U.S. Equity Markets?," with Craig Doidge and G. Andrew Karolyi, Journal of Finance, v.65(4), 1507-1553.
Handle: RePEc:nbr:nberwo:14245

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Cited by:
  1. Tay, Nicholas S.P. & Oladi, Reza, 2011. "Listings from the emerging economies: An opportunity for reputable stock exchanges," International Review of Economics & Finance, Elsevier, Elsevier, vol. 20(3), pages 388-394, June.
  2. Doidge, Craig & Andrew Karolyi, G. & Stulz, Ren M., 2009. "Has New York become less competitive than London in global markets? Evaluating foreign listing choices over time," Journal of Financial Economics, Elsevier, Elsevier, vol. 91(3), pages 253-277, March.
  3. Fernandes, Nuno & Lel, Ugur & Miller, Darius P., 2010. "Escape from New York: The market impact of loosening disclosure requirements," Journal of Financial Economics, Elsevier, Elsevier, vol. 95(2), pages 129-147, February.

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