Jonathan Witmer, in Why do Firms Cross-(de)list? An Examination of the Determinants and Effects of Cross-delisting, finds that cross-listed stocks are more likely to delist in the US if they have a relatively low US trading volume and if they are from countries with weaker investor protection. Moreover, firms were more likely to delist in 2002 and 03, after SOX and after the requirement of electronic filing. Interesting data, but the implications are not obvious.
The author sees the SOX effect as suggesting either that the "bonding" benefits of cross-listing were less than costs in 2002 and 2003 or that the governance benefits of US listing declined in the wake of SOX. But he says the correlation of delisting with poorer investor protection was inconsistent with the bonding explanation.
I have a different take. Firms from countries with weaker investor protection have higher marginal costs of complying with US standards. After SOX it’s plausible that these costs were less than benefits of listing in the US, particularly if the firm got little benefit from trading in the US -- that is, if most of the benefit was being able to sell shares at home and elsewhere rather than here. In other words, the firms with low trading volume in the US were those seeking mainly bonding, and for them US listing wasn't worth the costs after SOX.
The paper confirms that when the costs of something go up, as did US cross-listing after SOX, the quantity demanded will go down unless the costs were accompanied by an increase in quality. My theory (Cross-Listing and Regulatory Competition) is that SOX was not cost-effective for foreign firms because it imposed substantive governance obligations on firms from different governance environments for which these obligations were not cost-effective.
So it's not clear that the paper shows that some firms aren't seeking to "bond" their disclosures by cross-listing. Instead, it might show that the benefits of this bonding -- and of the US trading markets generally -- are not infinite. As we've seen in recent years, SOX has caused lots of firms to ask themselves how great those benefits really are.
As a person who deals with companies that are both U.S. and foreign it is clear that the firms you are mentioning were marginal before SOX. SOX just put the hammer in their "listing coffins". No loss for U.S. markets. By the way, what is the total number of cross-listed firms that have left SEC regukated markets?
Posted by: Charley Best | May 22, 2006 at 04:06 PM