M-RCBG Associate Working Paper No. 1

Domestic Intentions, International Repercussions: An Empirical Study on the Impact of Sarbanes-Oxley on Latin American ADRs

Pablo Tsutsumi



This paper examines the impact of the Sarbanes-Oxley Act on publicly traded firms by analyzing its effect on Latin American companies traded in the United States through Depositary Receipt programs in relation to their non-U.S. trading Latin American competitors. In my analysis, I address the potential selection bias issue that may arise when comparing the returns of ADRs with those of their domestic competitors as a result of the endogeneity of the cross-listing decision. The findings of the present study indicate that ADRs display negative and significant abnormal returns in association with events that signaled that different provisions of the Act (or the Act itself) would be implemented, and respond positively to events indicating that accommodations could be made for foreign issuers. Moreover, controlling for selection bias causes the significance and the magnitude of the effects to increase. Overall, the evidence of my empirical analyses is consistent with the notion that the effects of Sarbanes-Oxley on foreign issuers may have been previously underestimated; for foreign issuers, the positive gains from improved disclosure standards seem to be outweighed by the costs of regulatory compliance.

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