The impact of loosening regulatory requirements on firm innovation: Evidence from SEC rule 12h-6

Abstract

The US Securities and Exchange Commission implemented Exchange Act Rule 12h-6 in 2007, which made it considerably easier for cross-listed firms in the US market to deregister and terminate their regulatory obligations as US exchange listings. Using a difference-in-differences research design, we predict and find that in the period after the implementation of Rule 12h-6, cross-listed firms have significantly less innovation than non-cross-listed domestic firms, which suggests that Rule 12h-6 impedes innovation in cross-listed firms. This effect is stronger for firms that rely more on external financing, have high R&D intensity, and face greater financial constraints. It is also more pronounced in countries with low investor protection, low regulatory quality, greater differences with the US Generally Accepted Accounting Principles, and less liberalized stock markets. The results of the channel analyses indicate that cross-listed firms experience lower sensitivity of R&D investment to stock price and a decrease in foreign institutional ownership in the post Rule 12h-6 implementation period. Taken together, our findings suggest that Rule 12h-6 reduces the benefits of cross-listing for foreign investors, which hinders innovation in non-US economies.