Are foreign issuers shunning the U.S.? Lots of rumors suggest that's happening, and there is some evidence that listings here have suffered in the wake of Sarbanes-Oxley. But the situation is complicated, and more than just rules are involved.

• Author: Marshall, Jeffrey
• Position: International

There's a theory out there, the kind heard around water coolers and in the halls during investment banking seminars, that the Sarbanes-Oxley Act is a bogeyman scaring potential foreign registrants from U.S. exchanges. More specifically, the rumors say, the Act's Section 404, the infamous internal controls section, has become to overseas firms a kind of horror story passed around the proverbial campfire.

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The stories aren't new; they've been building over the past three years as U.S. public companies wrestled with the law and the number of foreign companies opting not to list in the U.S. has surged. And, like most stories, there is both truth and misperception. A closer look shows that the situation is far less black-and-white than it might seem on the surface.

Statistically, there's no question that foreign exchanges are doing much more business--but not all of that is being taken from the U.S. And while Sarbanes-Oxley is frequently cited as a reason for steering clear of the U.S., market observers say those fears have been moderating as the law's dimensions have become better known. Moreover, many foreign companies continue to list in the U.S.--listing dollar totals have doubled this year over last--because its capital markets are the deepest, the most liquid and the most transparent in the world.

Still, it's impossible to ignore a number of developments with respect to foreign issuers:

* The rise of the London Stock Exchange's Alternative Investment Market (AIM), which has become a market of choice for many emerging companies, including many in the U.S. (see "The AIM is Growth," box on this page). It touts its regulatory "flexibility" and lack of formal, documented requirements for its sharp growth in recent years.

* The continued distaste in Europe for Sarbanes-Oxley-type regulation. "The European tendency is to let issuers regulate themselves by adopting codes of corporate governance, not to impose good practice on them, as Congress and the SEC [Securities and Exchange Commission] do," wrote Prof. Roberta Karmel of Brooklyn Law School in an article in the Bowne Digest in October 2004.

Similarly, a study by Mazars, the European accounting and professional services firm, indicated that European companies were more hostile to this type of regulation than those from Asia and Latin America, which saw compliance as a means of winning investors' trust.

Episodes like the flight of Porsche AG, the German sports car legend, certainly provide evidence of some European annoyance. In October 2002, Porsche announced it had decided not to go forward with its intended listing on the New York Stock Exchange (NYSE), due to Sarbanes-Oxley. It subsequently listed on the Frankfurt Stock Exchange.

* The documented chill coming from Asia. According to Dealogic, which tracks investment banking transactions, in 2000 the NYSE and Nasdaq had a 25 per cent market share (in value terms) of listings from companies based in Asia, excluding Japan. In the year to date, the comparable number is a paltry 4 per cent.

* The fact that all but one of the 25 largest initial public offerings (IPOs) last year listed outside the U.S. Many of those, however, were state-owned enterprises that chose to list on their local exchange, including China, where three of the five largest IPOs in 2005 came out on the Hong Kong Stock Exchange.

Yet, for all of this, the dropoff in foreign registrants hasn't been exactly momentous. The total fell from 1,344 at yearend 2001 to 1,236 at the close of 2005, a slide of 8 percent (see table on page 28). The Over-the-Counter (OTC) index for small companies still has the most listings, followed closely by the NYSE and then Nasdaq, both for its Stock Market and the Capital Market for small-cap companies. Canadian companies represented fully 515 of the listings, or 42 percent; the U.K. was a...