Sarbox attacks New York

The drumbeat of SOX-related bad news continues. Yesterday I wrote about SOX’s effect in reducing initial public offerings, and Tuesday about its effect in encouraging firms to go private. I have written often about SOX’s negative effect on US listings of foreign firms, most recently here.

Today’s WSJ reports on the latter phenomenon: New York’s share of new stock offerings of foreign companies has dropped from 90% in 2000 to 10%. The article says a “significant” factor is the high costs Sarbox imposes on foreign firms.

Why should we care? Unlike the two other recent stories above, this probably isn’t about SOX affecting the level of entrepreneurial activity – the same firms are just going elsewhere. Unlike firms organized under US law and doing business here, these firms can easily avoid the US market and US law as long as they don’t list in the US.

The problems are reduced fees to the US securities industry and reduced access of US investors to foreign firms, because of the higher costs of trading foreign firms on foreign than on US markets.

As Geoff Manne wrote here last month, linking an earlier WSJ story, London is pressing its regulatory advantage.  It's offering a special low-cost market (AIM) for smaller companies just as the US, through SOX, is raising costs for these firms.

Lower regulatory costs don’t necessarily add up to greater value if investors perceive that the regulation is adding something. But Kate Litvak’s paper indicates that they don’t. This also indicates that the flight to London and elsewhere isn’t a “race to the bottom” driven by insiders who want to rip off investors.

Ironically, this phenomenon is hurting the “ordinary investors” Congress and the SEC always purport to worry about. Professionals can buy GDRs in London.

Part of this trend is driven by US macro factors that are hurting US stocks relative to those elsewhere. The WSJ story points out that stocks will come back here when the factors shift, as they are already starting to do. It’s hard to know without more data precisely what’s driving the foreign IPOs away. But since we know that SOX is costly for these firms, we also know that SOX imposes a regulatory tax that is likely having an effect on the margin. Because of foreign firms’ mobility discussed above, price is going to loom large in their choice of where to list.

These stories about SOX's effect may be building a momentum for reducing SOX's application to smaller and foreign firms.  Hopefully also they're building a record that can be used against the next SOX Congress tries to foist on American, and foreign, firms.

Comments

[Bob Smith]

Can US firms list on a foreign exchange without being subject to SOX? That might be an interesting way to acquire public capital without the restrictions of SOX.

[Ciarán]

Bob, I don't think so:. To the best of my knowledge, provided a number of their shareholders are resident in the USA they'd be subject to SOX.