November 07, 2006
The Impact of Sarbanes-Oxley on Foreign Companies
Posted by Lisa Fairfax

No talk on politics, but . . .

Kate Litvak spoke at a Georgetown workshop on the impact of SOX on non-US companies cross listed in the US.  Her paper adds to the research suggesting that SOX has had a negative impact on foreign companies, but in an interesting way.  I certainly will not do justice to the paper, including the detailed empirical analysis so I encourage you to read it.  However, in the paper she compares the stock price reactions of foreign companies subject to the Act, with the reaction of similar foreign companies not subject to SOX.   Her approach is interesting because it seeks to isolate the effects of SOX from the effects of other contemporaneous events--an isolation that cannot be done with US companies because all of those companies are subject to the Act.  Controlling for other factors, her paper found significant negative reactions to events associated with the passage of SOX.  While the paper does not answer the question of whether SOX was a good idea, it certainly suggests that foregin investors did not perceive the Act in a positive light, and hence adds to the growing concern that the Act has had a negative impact on such investors. 

What does this mean for US companies?  It supports the hypothesis that all investors reacted negatively to SOX.  It also suggests that the negative US reaction stemmed from the Act itself, rather than the legal or political environment surronding the passage of the Act.  Some may hypothesize that in the US, negative investor reaction could be attributed to the increased threat of criminal and civil prosecutions of corporate executives as opposed to SOX itself.  While Kate's study provides some evidence contradicting that hypothesis, it is not clear that foreign investors viewed the threat of prosecutions in the same manner as US investors.  Hence, when you control for all variables with those investors, SOX may have more of an impact on them than US investors who sometimes appear to conflate their concerns about SOX with concerns about the increased threat of criminal and civil prosecitions associated with US companies.

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