The Benefits of SOX

When this Blog began some twenty or so months ago (for a history of its foundation, go here), a central purpose was to write about Sarbanes Oxley and the benefits (as well as the problems) flowing from the law.  It was meant at least in part to offset what was a concentrated attack on the law by those who did not like the provisions or the way it was enacted.  These views were largely addressed in my piece, Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance. The criticism has largely died down, with most (but not all as Larry Ribstein reminds us from time to time) recognizing the largely beneficial nature of the changes.  Moreover, new data points in a positive direction.

In that regard, the NYT discussed a new study done by Professors Doidge, Karolyi and Stultz (from Ontario and Ohio State respectively) on why some foreign firms have decamped from the US to determine what role if any that SOX played in the process.  It is not, by the way, the first time that we have had an opportunity on this Blog to discuss their work.   As the abstract to the paper concludes:

• We find that these firms experienced significantly slower growth and lower stock returns than other U.S. exchange-listed foreign firms in the years preceding the decision. There is weak evidence that firms experience negative stock returns when they announce deregistration and stronger evidence that the stock-price reaction is worse for firms with higher growth. When we examine stock-price reactions around events associated with the passage of the Sarbanes-Oxley Act (SOX), we find negative average stock-price reactions with some specifications but not others. Further, there is no evidence that deregistering firms were affected more negatively by SOX than foreign-listed firms that did not deregister. Our evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home.

The study includes only 59 companies but the conclusions are common sense.  Companies leave the United States not because of SOX (or, frankly because of the risk of litigation) but because the capital raising advantages to a listing in the United States are no longer present.  In other words, the decision to list in the US or to delist from the US is based on economics, not inchoate fears about liability or concerns about the regulation of corporate governance.