SOX Didn't Force Away Foreign Firms: Study
The bugles sounded! The wagons circled! And the Hank Paulsons of the world, dressed in the blue and yellow of the cavalry, prepared for the attack!
The attack, of course, was coming from the Sarbanes-Oxley Act that the John Waynes of Big Business such as Tom Donohue of the U.S. Chamber of Commerce and Treasury Secretary Henry "Hank" Paulson vigorously claim has made foreign firms retreat from U.S. stock markets. One famous factoid was that in 2005, only one of the 25 or so top listings by foreign firms chose U.S. bourses as their listing venue. The culprit? SOX over-regulation!
Now comes a study by the three finance professors that throws some serious cold water on that theory. G. Andrew Karolyi and Rene M. Stulz of Ohio State and Craig Doidge of the University of Toronto report in a new study that SOX didn't have a lot to do with any of the foreign firms leaving or avoiding listing in the U.S.
One major reason is that the U.S. Securities & Exchange Commission changed its rules in 2007 making it easier for foreign-based firms to skee-daddle from U.S. markets if they wanted to. Before, SEC filing requirements stuck like permanent glue, meaing foreigners had to keep filing according to SEC rules even if they no longer did much business in the U.S.
In a telephone interview with me, Prof. Karolyi said that he and his colleagues wanted to make a systematic review of foreign firms that de-registered from U.S. stock markets and left. They reviewed 105 firms in a six month period in 2007 and were able to cull away all but 59.
The team found that a number of the remaining firms had slow-growth valuations or their dates of de-registering didn't seem to have much to do with SOX. They reviewed the share prices of the stocks when the SEC announced its new policy on easier de-regitering in March 2007 and also on the date when the firms announced their intended departure. Again, no clear influence from SOX was evident, says Karolyi.
Regarding comments from New York Stock Exchange and Nasdaq officials regarding "overregulation" by SOX forcing firms out, Karolyi told me, "Of course, they want to register as many firms as they can. But maybe, some of these firms aren't ones you'd want to have listed, anyway."
The professorial trio have written similar papers in the past, but they aren't the only ones with the nerve and the brains to challenge conventional Corporate America wisdom.
One of my favorite articles on the topic is a February 2007 work by James Surowiecki in The New Yorker. He notes that the whining by American business people about SOX forcing foreigners away "is a radically oversimplified explanation of what's been happening." Surowiecki noted that the biggest I.P.O.s in recent years have been privatizations of huge state-owned companies in China and Europe that were highly unlikely to be listed on American exchanges anyway.
The more recent study states that some of the foreign-based firms that left the country didn't rush off in a huff over excessive regulatory costs from SOX. Rather, they weren't doing well over here anyway and departed with their tails between their legs.
How a little splash of reality can clear the mind!