The midfielder and Northern Ireland captain, having departed Rangers, becomes the newly-promoted side's second signing of the summer after Jay Rodriguez joined from Burnley
The Northern Irish midfielder was one of several players who refused to transfer his contract from Rangers to the club's newco this summer.
The Aston Villa academy graduate revealed that he had had offers from other clubs but was impressed by St Mary's Stadium boss Nigel Adkins.
Davis told the Saints' official website: "I'm delighted to get everything done and dusted, and I'm looking forward to getting started. There was quite a bit of interest in me from other clubs but, after speaking to the chairman and the manager, I saw the level of ambition the club has shown.
"They've had a lot of success over the past couple of years to get to this stage, and they don't want to stand still - they want to keep moving forward, and that was a big thing for me.
"Now I'm just looking forward to getting down, getting to know the boys and getting started."
Adkins was also delighted to seal the deal and hopes that the Northern Ireland captain's experience can help guide the Saints to Premier League safety on their return to the top flight.
He added: "It's very good and I'm very pleased.
|SAINTS MARCH DOWN
|11/8||Southampton are 11/8 with Bet365 to be relegated straight back down to the Championship from the Premier League next season|
"Obviously the work the club has gone and done to make it happen is really promising for the future. Steven's an experienced player - a very talented football player who has played international football, captained his country, captained Rangers, and played in the Premier League.
"He's at a good age and comes with a wealth of experience as well.
"We work very hard behind the scenes and we're delighted that the football club has managed to secure his services."