The Sarbanes-Oxley Act and the Flow of International Listings

This paper examines cross-listing behavior onto U.S. and U.K. stock exchanges following the enactment of the Sarbanes-Oxley Act, and tests two propositions. First, has the rate of foreign cross-listings onto U.S. exchanges decreased in the period following the enactment of the Act? Second, are foreign exchanges in particular, the London Stock Exchange attracting foreign firms in the post-Act period that would have otherwise listed on a U.S exchange prior to the enactment of the Act? We find strong evidence that U.S. exchanges have experienced a decrease frequency of foreign listing following the Act. For the NYSE, the decline does not appear to be attributed to listings lost to the LSE’s Main Market after the enactment of the Act. In contrast, our evidence suggests that a portion of the decline in foreign listings on the Nasdaq is attributable to firms bypassing a U.S. exchange listing and opting to list on the LSE’s Alternative Investment Market following the enactment of the Act. These “lost” listings are composed of firms that are, on average, smaller and less profitable than both the firms predicted to list on the Nasdaq and that the firms that actually listed on the exchange in the post-Sarbanes-Oxley period. Together, these patterns are consistent with Sarbanes-Oxley screening out firms from the left tail of the distribution of likely U.S. listing candidates along the dimensions of firm performance and size. Together, our analysis provides the first evidence (of which we are aware) of how the Sarbanes-Oxley Act has altered the flow of foreign listings across international stock exchanges.