Publication Type
Journal Article
Version
submittedVersion
Publication Date
10-2024
Abstract
Existing studies tend to focus on how a legal system reinforces the efficiency of its domestic firms or foreign companies that are subject to its domestic jurisdiction (e.g., via cross-listing). Our study provides critical normative implications in the era of financial globalization by showing that the influence of a country’s legal institutions extend beyond its territorial boundaries. We examine whether US shareholder-initiated class action lawsuits can discipline non-US firms. Using an international sample of firms over the period 1994–2019, we find that a US class action lawsuit against a non-US firm cross-listed in the US negatively affects the value of its non-US-listed industry peers. The effect is robust in both event-based analyses for short-term market reaction and stacked difference-in-difference analyses for long-term valuation. We uncover two economic mechanisms underlying this effect: information sharing and policy coordination between the US and the non-US firm’s home country. Specifically, the cross-border disciplining effect is more pronounced for firms from countries that lack information and that coordinate with the US at the policy level. Moreover, non-US peer firms subsequently improve their governance practices and financial policies to restore shareholder value. Our findings suggest that private enforcement in the US has a worldwide influence.
Keywords
Lawsuits, class action, governance, valuation, corporate financial policy
Discipline
Business Law, Public Responsibility, and Ethics | Corporate Finance
Research Areas
Finance
Publication
Journal of International Business Studies
ISSN
0047-2506
Identifier
10.1057/s41267-024-00746-y
Publisher
Palgrave Macmillan
Citation
MASSA, Massimo; WANG, Xiaoqiao; ZHANG, Bohui; and ZHANG, Hong.
The boundaries of the law: Can US private enforcement discipline foreign firms?. (2024). Journal of International Business Studies.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7654
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1057/s41267-024-00746-y
