What Makes the Bonding Stick? A Natural Experiment Involving the U.S. Supreme Court and Cross-Listed Firms

Abstract:     
On March 29, 2010, the U.S. Supreme Court signaled its intention to geographically limit the reach of the U.S. securities antifraud regime and thus differentially exclude U.S.-listed foreign firms from the ambit of formal U.S. antifraud enforcement. We exploit this legal surprise as a natural experiment to test the legal bonding hypothesis - namely, to assess firms’ ability to use other countries’ enforcement institutions as institutional substitutes and, more broadly, to assess the value of the U.S. legal enforcement mechanism. This event nonetheless was met with positive or indifferent market reactions using Brown-Warner, matched samples, and portfolio analyses. We also observe little change in the price premium for U.S.-traded equities, bid-ask spreads, or the proportion of U.S. trading volume. These results challenge the view of at least the U.S. civil liability regime, as currently designed, as a source of value for such firms and warrant closer examination of the operation of formal enforcement institutions.

Number of Pages in PDF File: 57

Keywords: cross-listing, corporate governance, civil liability, bonding

JEL Classification: G15, G18, G38

working papers series