How Would the Stock Exchange Monitoring Role Affect the Performance of U.S. Firms: Evidence From Cross‐Listed Firms in the United States

Published date01 May 2017
Date01 May 2017
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22274
How Would the Stock Exchange
Monitoring Role Affect the
Performance of U.S. Firms:
Evidence From Cross-Listed
Firms in the United States
Enas A. Hassan
This article
examines the effect
of stock exchange
monitoring on a
firm’s performance.
A large volume of
literature in finan-
cial economics
explores how stock
exchanges perform
their unique roles
and how firm-stock
exchange relation-
ships affect a
firm’s business
(e.g., L. D. Brown &
Caylor, 2009; Frost,
Gordon, & Hayes,
2006; Krishnamurti,
Sequeira, &
Fangjian, 2003).
Despite a num-
ber of theoretical
discussions on stock
exchange monitoring,
however, little empiri-
cal evidence has been
done on whether stock
exchange monitoring
is successful (Holm-
strom & Tirole, 1993).
Further, those studies
that do examine this
issue explore lim-
ited aspects of stock
exchange governance
functions, such as
market depth (liquidity)
(Cumming, Johan, &
Li, 2011) and the
governance and trad-
ing system structure
(e.g., Krishnamurti
et al., 2003; La Porta,
Lopez-De-Silanes, &
Shleifer, 2006). Thus,
the main objective
of this study is to
Stock exchanges perform governance activities, among
these activities, monitoring is considered as one of the
stock exchanges most distinctive and important activi-
ties, since it increases shareholders’ ability to evaluate
managerial performance, and put in place effective
managerial incentive schemes; yet little research atten-
tion has focused on the effects of stock exchanges as an
external mechanism on firm performance. This article
provides empirical evidence on whether stock exchange
monitoring is successful. Using a comprehensive mea-
sure comprising a range of stock exchange monitoring
factors suggested by prior literature as important deter-
minants of stock exchange monitoring role, the results
indicate that the strength of stock exchange monitoring
is positively associated with firm performance as mea-
sured by return on assets, return on equity and Tobin’s
Q. A more comprehensive analysis provides additional
evidence suggests that U.S. firms are more likely to be
influenced by U.S. stock exchanges monitoring than
their non-U.S. counterparts and the incremental legal
bonding benefit provided by the Sarbanes-Oxley Act
(SOX) for U.S. firms was exceeded by SOX’s incremental
costs. Finally, the findings of this study highlight a num-
ber of implications for academics, the SEC and other
international standard setters, securities regulators, and
stock exchange operators. © 2017 Wiley Periodicals, Inc.
Refereed (Double-Blind
Peer Reviewed)
The Journal of Corporate Accounting & Finance / May/June 2017 21
© 2017 Wiley Periodicals, Inc. DOI 10.1002/jcaf
empirically examine the effec-
tiveness of stock exchange
monitoring by using firm per-
formance. Further, instead of
considering just a single mea-
sure of governance, this study
expands extant literature by
developing a comprehensive
measure of stock exchange
monitoring comprising a range
of stock exchange monitor-
ing factors suggested by prior
literature as important determi-
nants of stock exchange moni-
toring role.
Stock exchanges perform
governance activities such as
setting listing requirements and
monitoring listed companies.
Among these activities, moni-
toring is considered as one of
the stock exchange’s most dis-
tinctive and important activities
(Frost et al., 2006). In general,
the purpose of stock exchange
monitoring is to increase share-
holders’ ability to evaluate
managerial performance, and
put in place effective manage-
rial incentive schemes (Bush-
mana & Smith, 2001; Lambert,
2001). Consequently, stock
exchanges have advantages in
performing a monitoring func-
tion. This is because (a) stock
exchanges impose governance
and disclosure rules that govern
the release of private informa-
tion, which reduces information
asymmetry between managers
and investors and increases
investor confidence; and (b)
they provide investors with
insights into firms to assess
managerial actions (Cumming
et al., 2011; Holmstrom &
Tirole, 1993; Humphery-Jenner,
Using 51,411 firm-year
observations between 2001
and 2010, results indicate that
there is a positive association
between the strength of stock
exchange monitoring and
firm performance, implying
that stock exchange plays an
important role in corporate
governance. These results
are not in line with, but also
add to the findings of Fang
et al. (2009), as it confirms
similar results while using
a comprehensive measure
rather than an individual mea-
sure (liquidity). Additional
analyses examine whether the
association, suggested by the
main results, continues to be
evident in the non-U.S. stock
exchanges. The result indicates
that U.S. firms’ performances
are more likely to be influ-
enced by U.S. stock exchange
monitoring than non-U.S.
stock exchanges. Further
analysis examines the main
association in the context of
non-U.S. firms, shows that
non-U.S. firms are less likely
to be influenced by U.S. stock
exchange monitoring than are
U.S. firms. Finally, the main
analysis expands to examine
the impact of the Sarbanes-
Oxley Act (SOX) on the
monitoring role of U.S. stock
exchanges. The results indi-
cate that SOX crowds out the
impact of stock exchange as a
monitor on firm performance.
A few recent studies are
closely related to this paper.
La Porta, Lopez-De-Silanes,
Shleifer, & Vishny (2000) show
that securities law, shareholder
protection, matters in improv-
ing firm performance. Fang
and colleagues’ (2009) results
indicate that firms with liquid
stocks have better perfor-
mance. While the findings in
these studies suggest that stock
exchange governance is related
to operating performance,
they provide little evidence
regarding the importance of
stock exchange monitoring
role in particular. Thus, unlike
prior research on the United
States, this paper, using a com-
prehensive measure of stock
exchange monitoring, contrib-
utes to the ongoing research
on the corporate governance
role of the stock exchange as
an external monitor in mitigat-
ing agency problems leading
to improved firm performance.
Further, the results of this
study may be of interest to the
Securities and Exchange Com-
mission (SEC), as it provides
implications for the likely
impact of stock exchange
monitoring on the corporate
governance as the focus has
shifted from attracting domes-
tic issuers to attracting larger
international companies. Con-
cerning competition among
stock exchanges, the finding of
this study may also encourage
regulators in other countries
to adopt effective policies with
a view to improving legislative
frameworks for corporate gov-
This article proceeds as
follows: the next section dis-
cusses the theoretical frame-
work. The third section reviews
related literature and develops
hypotheses. The fourth, fifth,
and sixth sections present the
variable construction, sample
selection, and research design.
The seventh section discusses
main and additional empiri-
cal results. The eighth section
presents results of robustness
tests. Finally, the ninth section
concludes the paper.
Scholars have widely
applied agency theory (AT)
to the study of corporate
governance as a monitoring
and control mechanism used
to curb agent opportunism
and minimize informational

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