Insights

Legal institutions are traditionally perceived as national in scope – i.e., confined to the jurisdiction of individual countries such that shareholder protection is restricted to the jurisdiction in which stocks are listed. Accordingly, 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). An interesting and unexplored question is could the influence of a country’s legal institutions extend beyond its territorial boundaries? Especially, given the importance of the US securities market, could the US legal institutions covering it also reach out globally and affect the efficiency of other countries’ financial markets? These questions have critical normative implications in the era of financial globalization.

Recently, Prof. Wang Xiaoqiao and Prof. Zhang Bohui of the School of Management and Economics, The Chinese University of Hong Kong, Shenzhen, together with Prof. Massimo Massa of INSEAD and Prof. Zhang Hong of Singapore Management University, co-authored the paper The Boundaries of the Law: Can US Private Enforcement Discipline Foreign Firms? was published in the top international journal International Business Studies. This study delves into the cross-border disciplining effect of US market investors' initiated class action lawsuits against non-US firms cross-listed in the US on the value of non-US firms in other global markets, using an international sample of firms from 1994 to 2019. The research finds 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 in the firm's home country. This effect is significant in both event-based analyses for short-term market reactions and stacked difference-in-difference analyses for long-term valuation.

Author

Wang Xiaoqiao 

Assistant Professor, School of Management and Economics, CUHK-Shenzhen 

Research Area

Product Market Relations, Capital Markets, Information Disclosure Strategies, Legal and Finance

Zhang Bohui

Presidential Chair Professor, Executive Dean of School of Management and Economics, CUHK-Shenzhen, Director of the Center for FinTech and Social Finance, Shenzhen Finance Institute,Associate Director of Shenzhen Institute of Data Economy 

Co-authors

Prof. Massimo Massa

INSEAD

Prof. Zhang Hong

Singapore Management University

Abstract

Existing studies tend to focus on how a legal system reinforces the efficiency of its domestic firms or foreign companies that 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. In specific, 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.