Gao 2011 studied the reaction to the 2002 Sarbanes
Gao ( 2011) studied the reaction to the 2002 Sarbanes- Oxley Act by non–U. S. firms issuing bonds in the U. S. bond market ( called the Yankee market). Foreign firms issuing bonds in this market are subject to Sarbanes- Oxley requirements. However, other non U. S. markets are also available for a firm that wishes to issue U. S.-denominated debt. After controlling for other factors that affect a firm’s choice of debt market, Gao found a significant reduction in the likelihood of foreign firms choosing the Yankee market.

a. Sarbanes- Oxley introduced new, more stringent requirements for corporate governance and financial reporting (see Section 1.2), designed to strengthen the alignment between firm managers and shareholders. Use contract theory to explain why Sarbanes- Oxley may have increased the concerns of bondholders, thereby contributing to the reluctance of firms, including foreign firms, to issue bonds in the Yankee market.
b. Despite the overall decrease in Yankee bond issues, Gao found that use of the Yankee market, relative to use of other non– U. S. bond markets, increased for foreign firms that already had listed their shares in the United States, and for foreign firms that had adopted IFRS in place of their local GAAP. Explain the likely reasons for these increases.
c. Gao also found that large firms, with large bond issues, also increased their relative use of the Yankee market. Explain why. Draw on the theory of Diamond and Verrechia (1991) (Section 12.9.1) in your answer.

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