Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act

• We examine the role of information asymmetry on foreign institutional investor (FII) decisions.
• We use particularly the enactment of the Sarbanes-Oxley Act (SOX) as our context for analysis.
• We investigate the behavior of institutional investors in U.S. from 18 foreign countries.
• We find that the enactment of SOX has positively impacted on FII decisions.
• We further show a shift in FII behavior toward riskier options, the smaller firms.

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.