Has Sarbanes-Oxley Made U.S. Financial Markets Less Competitive?

Remember all the noise from Treasury Secretary Paulson and others about how Sarbanes-Oxley financial market regulation is making it difficult for US financial markets to compete with foreign markets? The goal is to ease or eliminate the restrictions which were put into place to protect investors after the Enron scandal. There's new evidence suggesting the claim that this regulation inhibits competiveness is false:

Maybe U.S. Markets Are Still Supreme, by Greg Ip, WSJ: In recent months, policy makers and business groups have argued that post-Enron regulatory burdens have made U.S. markets less competitive -- citing as proof the many foreign companies that list their shares in London instead of New York.

Now, three academic pioneers in the field are casting doubt on the assertion.

In a new study, they conclude there is no evidence the much-criticized 2002 Sarbanes-Oxley Act, which beefed up corporate accounting and financial disclosures, among other things, increased London's appeal to foreign companies at New York's expense...

The research also found that investors are still willing to pay a sizable premium for foreign-company shares listed in the U.S., in return for meeting tough U.S. regulatory standards. Foreign-company stocks in London receive no similar premium, they said.

The researchers also say the decline in new foreign listings on U.S. stock markets since 2001 isn't due to regulatory overkill. Rather, today there are simply fewer foreign companies that fit the historic profile for listing abroad...

Relative to historical patterns, the U.S. attracted more foreign companies since 2001 than would have been predicted, while London attracted slightly fewer.

"All of our evidence is consistent with the theory that there is a distinct governance benefit for firms that list on the U.S. exchanges," say the authors, Andrew Karolyi and René Stulz of Ohio State University and Craig Doidge of the University of Toronto. "There is no evidence...this benefit has weakened over time."

Experts and policy makers have been arguing over the impact of the post-Enron crackdown for months. Treasury Secretary Henry Paulson ... and others have cited the shrinking number of foreign new-stock offerings and company listings on NYSE Euronext's New York Stock Exchange and Nasdaq Stock Market Inc.'s Nasdaq Stock Market as proof that regulatory burdens and legal risk are driving that activity to competing markets.

The Securities and Exchange Commission is moving to loosen Sarbanes-Oxley's internal-auditing guidelines for small companies and recently made it easier for foreign companies to shed SEC oversight. It is also moving to loosen the requirement that U.S.-listed foreign companies use U.S. accounting standards. ...

In an interview, Mr. Karolyi said he doesn't question the merits of revisiting the U.S. regulatory burden. But he cautioned against a "rush to judgment. ..." ... He said [the] findings suggest policy makers should be cautious about easing oversight of foreign companies in the U.S.