In our paper, Why Do Firms Leave U.S. Equity Markets?, which is forthcoming in the Journal of Finance, we analyze a sample of firms that voluntarily deregister from the SEC and leave the U.S. equity markets over the period from 2002 through 2008. Because it was extremely difficult to deregister before March 21, 2007 when the SEC adopted its new Exchange Act Rule 12h-6, foreign firms that wished to deregister most likely did not do so because they were unable to meet the necessary requirements. When Rule 12h-6 came into effect, deregistration became substantially easier and the change in the rules was followed by a large spike in the number of deregistrations. We investigate why foreign firms deregister, how the Rule change affected firms’ deregistration decisions, and what the economic consequences are of the decisions to deregister.

Two theories offer predictions on which firms are likely to deregister and on the consequences of deregistration for minority shareholders. The first theory follows directly from the bonding theory of cross-listing that predicts corporate insiders value a listing when their firm has valuable growth opportunities that they can finance on better terms by committing to the laws and rules that govern U.S. markets. The listing comes at a cost to insiders since it limits their ability to extract private benefits from their controlling position. If a firm is no longer expected to require outside financing because its growth opportunities have been taken advantage of, or because they have disappeared, a listing is no longer valuable for insiders; the costs of a U.S. listing outweigh the benefits. Consequently, firms that deregister should be those with poor growth opportunities, with little need for external capital, and those which perform poorly. We find support for these predictions.

(more…)