The critics of the Sarbanes-Oxley Act (SOX) say that the regulation has made the U.S. less competitive, causing an exodus of companies to less-regulated stock exchanges in London and Hong Kong. The authors of a new paper defy this common wisdom. They find that when firms' characteristics such as size and type are factored in, the listing gap disappears.
"Before you jump to the conclusion that this is evidence of New York losing market share, remember most of those firms wouldn't qualify for the listing in New York. It's apples and oranges" says George Karolyi, one of the co-authors.
In general, whether they list on the NYSE or NASDAQ, firms are subject to SEC oversight, they are exposed to class action lawsuits, and face additional monitoring by market participants, such as analysts and institutional investors.
Although there is a common belief that listing in London provides a certain level of good governance, firms […] in London generally need only comply with the governance rules of their home country [and] are subject to a "light touch" approach to regulation.
Even more interesting is the good-governance premium. Between 2002 and 2005 foreign companies with shares listed exclusively in the United States traded at over a 14 percent premium compared with their counterparts registered on foreign exchanges. Crosslisting in the U.S. also improved firms' ability to raise capital both at home and abroad, whereas listing in London has no effect. According to Wharton finance professor Richard Marston:
"Good governance can enhance the attractiveness of one country's financial markets relative to another's. It can also enhance the attractiveness of one company's stock relative to another's within the same market."
It's still too early to access the long-term effects of SOX. Over the last five years the views have been ranging from "intrusive, expensive and heavy-handed" to positive.
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