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

Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require outside funds to finance growth opportunities. Deregistering firms’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock-price reactions to the adoption of Rule 12h-6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock-price reactions to deregistration announcements are negative, but less so under Rule 12h-6, and more so for firms that raise fewer funds externally. A LARGE LITERATURE examines why foreign firms choose to list their shares on a U.S. stock exchange.1 Recently, there has been an increase in the number of foreign firms leaving U.S. markets. This has led to the concern that U.S. stock exchanges have become less attractive to foreign firms, perhaps because of the passage of the Sarbanes–Oxley Act (SOX) in 2002. For foreign firms to escape all the obligations they accept by listing on a U.S. stock exchange they must delist from that exchange and terminate registration and reporting requirements (or “deregister”) with the Securities and Exchange Commission (SEC); without deregistering, a foreign firm is still subject to U.S. securities laws. Until recently, deregistration was very difficult. However, on March 21, 2007, the SEC adopted a new rule (referred to as Exchange Act Rule 12h6) that makes it much easier for foreign firms to deregister. Following this policy change, more exchange-listed firms deregistered in 2007 and 2008 than ∗Doidge is at the Rotman School of Management, University of Toronto. Karolyi is at the Johnson Graduate School of Management, Cornell University. Stulz is at the Fisher College of Business, Ohio State University, ECGI, and NBER. Warren Bailey, Cam Harvey (Editor), Gerhard Hertig, Greg Miller, two anonymous referees, and an associate editor provided useful comments as did seminar participants at the Chinese University of Hong Kong, HEC Montreal, Ohio State University, Nanyang Technological University, National University of Singapore, Singapore Management University, the Swiss Federal Institute of Technology, and the University of North Carolina Global Issues in Accounting Conference. We thank Paul Bennett, Jean Tobin, Greg Krowitz, and other members of the New York Stock Exchange’s Market Listings group for their help with data and background information on listings. Mike Anderson, Aray Gustavo Feldens, Rose Liao, and Xiaoyu Xie provided excellent research assistance. Doidge thanks the Social Sciences and Humanities Research Council of Canada and Karolyi thanks Ohio State University’s Dice Center for Financial Economics for financial support. 1See Karolyi (2006) for a review of this literature.