Sarbanes-Oxley and Foreign Delistings from the NYSE

According to the Sun Herald, foreign company delistings from the New York Stock Exchange rose from 6.6% in 2006 to 15.1% in 2007. The average rate between 1997 and 2006 was 7.3%. New SEC rules “permitting deregistration by foreign companies with low U.S. trading volumes became effective June 4, 2007….this pent up demand is a reflection of the unattractiveness of the U.S. public equity market.”

Ironically, delistings are not from developing nations, but rather from Western Europe:

Of the 53 companies that delisted not due to an acquisition, 43 were from Western Europe (8 each from the UK and France and 7 from Germany) and 4 were from Australia. Only 5 of the 53 delisting companies were from emerging market countries — Chile (1), Brazil (1), Hong Kong/China (2) and Israel (1).

The rise in delistings has prompted much discussion regarding the efficacy of Sarbanes-Oxley.
Is it an onerous regulation as the above article suggests…or is it separating the chaff from the wheat?

The purpose of Sarbanes-Oxley Act (2002) is to improve financial accounting and to insist on responsible corporate governance.

The authors of a 2006 study, “Is the Sarbanes-Oxley Act Scaring Away Lemons or Oranges?” conclude that lemons are the case.

we find that voluntary delisting firms tend to have weaker corporate governance systems as measured by several traditional corporate governance proxies (proportion of outside directors, ownership concentration, and financial reporting quality). We find additional support for this result when we introduce investors’ price response to SOX-related events as a broad proxy for investors’ assessment of their firm’s corporate governance quality.

A number of accounting and governance scandals–Enron, Tycho, Adelphi, et al–prompted the passage of Sarbanes-Oxley.

Nonetheless, expect the argument over Sarbanes-Oxley now to be joined once again.