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Impact of Sarbanes-Oxley Act on Cross-Listing

Using a sample of newly initiated American Depository Receipt (ADR) programs over the period 2000 and 2004, this paper examines the effect of Sarbanes-Oxley Act (SOX) on the cross-listing decision and the value consequences of cross-listing by foreign firms. We find that the passage of SOX did not significantly lower the propensity of foreign firms to cross-list their shares on U.S. financial markets. However, we show that the adoption of SOX: (i) increased (decreased) the likelihood of cross-listing by firms from countries with civil (common) law legal systems; (ii) induced firms from civil (common) law countries to cross-list their shares primarily on the OTC (exchange); and (iii) raised the value of cross-listing on the OTC making its difference from exchange market listing insignificant. Our results suggest that post-SOX, foreign firms from common law countries sought functional convergence through legal bonding by cross-listing on an exchange but were deterred by the mandated corporate restructuring as well as legal and administrative costs associated with SOX compliance and elected to cross-list in alternative global financial market venues instead. For foreign firms from civil law countries for whom functional convergence with U.S. financial markets through reputational bonding was sufficient, the strengthened corporate governance environment from SOX encouraged cross-listing on the OTC.