First Impressions Count: Foreign Firms' Entry and Exit from the U.S.

We examine the listings and delistings of foreign firms from major U.S. exchanges over the period 1962 - 2006. Over this period a total of 1,344 firms listed and 724 firms delisted due to merger and acquisitions, involuntary, or voluntary reasons. We examine whether certain characteristics of a foreign firm at listing increase the likelihood of achieving benefits from listing in the U.S. market. Entry characteristics shape the probability that a firm will be able to achieve benefits from listing and help identify the firms most sensitive to changes in the costs and benefits of listing. Firms that are just "over the bar" with respect to benefits, when exogenous shocks such as SOX occur, are more likely to delist. In the first year of listing, we find large differences in firm quality and other attributes between the firms that delist and the firms that remain listed, that detract from the former's ability to generate benefits. Entry characteristics are also relevant to the question of whether SOX is driving firms from the U.S. market because they shape the expectations with respect to the costs of regulation. We estimate a probit model of the probability of delisting before and after SOX that compares the firms that remain listed in the U.S. to the firms delisting. We focus on the firms that listed before SOX and delisted after SOX because they were less likely to have anticipated the change in regulation (were "caught off guard") when they listed. Holding other factors constant, firms delisting prior to SOX are significantly more likely to be from poor governance countries, whereas firms delisting after SOX are significantly more likely to be from good governance countries. Consistent with the bonding hypothesis, the costs of obtaining U.S. certification unexpectedly increases for these firms following SOX, leading those from good governance countries to exit the U.S. The departing firms also shed light on the entering firms. The voluntary delists that are caught off guard by SOX are small, somewhat less profitable firms, have lower analyst coverage, and make less use of capital raising compared to firms that remain listed in the U.S. Eighty percent of their home markets are developed and have strong governance. These firms do not appear to realize large benefits from listing in the U.S.