The Impact of Sarbanes-Oxley on Earnings Quality and the Cross-Listing Decision
Abstract
An expected outcome from the Sarbanes-Oxley Act [SOX, hereafter] was to improve the overall quality of financial reporting in the U.S. However, many believe the increased regulations imposed excessive costs on companies with little improvement in financial reporting quality. SOX may have also imposed costs on U.S. investors by limiting their investment choices in foreign companies listed on U.S. exchanges. SOX applies to all publicly-traded companies, including foreign companies that cross list on U.S. exchanges. Immediately following SOX, the number of companies choosing to cross list in the U.S. declined significantly (Piotroski and Srinivasan 2008), but to the extent that SOX resulted in companies with lower quality earnings choosing to cross list elsewhere, the additional costs to U.S. investors - limiting foreign investment choices - may be worthwhile. Overall, I find SOX had no definitive influence on the earnings quality of cross-listers both in the U.S. and globally. My results indicate that SOX has had a greater influence on domestic U.S. companies' earnings quality compared to cross-listers in the U.S. While I do find earnings quality is higher for cross-listers in the U.S. versus elsewhere, the earnings quality for neither group improved around SOX. Overall, my results suggest the costs from SOX exceed the benefits from improved reporting quality, at least as it relates to cross-listers. Further, my findings are consistent with criticisms of the bonding hypothesis. While some may believe that cross-listed companies are bonding themselves to U.S. regulations and reporting quality, the evidence in this paper suggest that regulations do not equally impact U.S. companies and foreign companies cross listing in the U.S.
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