Why do foreign firms leave US equity markets? An analysis of deregistrations under SEC Exchange Act Rule 12h-6. Unpublished working paper

Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require out-side funds to finance growth opportunities. Deregistering firms ’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock-price reactions to the adoption of Rule 12h-6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock-price reactions to deregistration announcements are negative, but less so under Rule 12h-6, and more so for firms that raise fewer funds externally. A LARGE LITERATURE examines why foreign firms choose to list their shares on a U.S. stock exchange.1 Recently, there has been an increase in the number of foreign firms leaving U.S. markets. This has led to the concern that U.S. stock exchanges have become less attractive to foreign firms, perhaps because of the passage of the Sarbanes–Oxley Act (SOX) in 2002. For foreign firms to escape all the obligations they accept by listing on a U.S. stock exchange they must delist from that exchange and terminate registration and reporting requirements (or “deregister”) with the Securities and Exchange Commission (SEC); without deregistering, a foreign firm is still subject to U.S. securities laws. Until recently, deregistration was very difficult. However, on March 21, 2007, the SEC adopted a new rule (referred to as Exchange Act Rule 12h-6) that makes it much easier for foreign firms to deregister. Following thi