Information Asymmetry, Disclosure and Foreign Institutional Investment: An Empirical Investigation of the Impact of the Sarbanes-Oxley Act

Abstract

Do foreign institutional investors (FII) regard the introduction of rigorous disclosure requirements as a major incentive to invest in U.S. equities? We investigate the role of information asymmetry and the impact of firm-level disclosure on FII decisions. We use a unique context for analysis -- the enactment of the Sarbanes-Oxley Act (SOX), and find that foreign institutional investors increase their equity holdings in U.S. listed firms following the passage of SOX. The increase in U.S. equity holdings is largely accounted by passive, non-monitoring FII, who have the most to gain from the SOX-led reduction in the value of private information.