Why ForeigN firms Leave Local Equity Markets

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Abstract

We analyze the characteristics of 59 firms that instantaneously announced they would deregister under the new rules, their potential motivations for doing so, as well as the economic consequences of their decisions. We find that these firms experienced significantly slower growth and lower stock returns than other U.S. exchange-listed foreign firms in the years preceding the decision. There is weak indication that firms experience negative stock returns when they announce Deregistration and stronger evidence that the stock -price reaction is worse for firms with higher growth. Though it is unclear whether the Sarbanes-Oxley Act (SOX) affected cross-listed firms adversely, there is no evidence that Deregistering firms were affected more negatively by SOX than foreign-listed firms that did not deregister. Our evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home.

Why Foreign firms Leave Local Equity Markets

Introduction

A large literature examines why foreign firms choose to list their shares on a U.S. stock exchange.

Until recently, it was extremely difficult for foreign firms cross-listed in the U.S. to terminate the obligations they imposed on themselves by cross-listing in the U.S. Though firms could delist from a U.S. exchange, they faced extremely tough obstacles in Deregistering. Without Deregistration, a foreign firm is still subject to U.S. securities laws as governed by the Securities Act of 1933 and the Securities Exchange Act of 1934. With this state of affairs, foreign firms that concluded U.S. laws and regulations had become too burdensome could not eliminate this burden easily. All of this changed with a new rule (referred to as Exchange Act Rule 12h-6) unanimously adopted by the Securities and Exchange Commission (SEC) on March 21, 2007. This rule makes it easier for foreign firms to deregister, so that now it is much more realistic for those firms cross-listed in the U.S. to consider taking the step of deregistration. As a result of this policy change, we can now learn more about the benefits and costs of cross-listings by investigating why firms choose to deregister and what the consequences of deregistration are for the shareholders of firms that do so.

Literature Review

With the bonding theory, a cross-listing has a cost for corporate insiders, which is that they face restrictions in consuming private benefits, and a benefit, which is that they can finance growth ...