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What Makes the Bonding Stick? A Natural Experiment Testing the Legal Bonding Hypothesis

72 Pages Posted: 24 Jan 2011 Last revised: 8 Sep 2017

Amir N. Licht

Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law; European Corporate Governance Institute (ECGI)

Christopher Poliquin

Harvard Business School

Jordan I. Siegel

University of Michigan

Xi Li

Hong Kong University of Science & Technology (HKUST)

Date Written: August 27, 2017

Abstract

We use a US Supreme Court case, Morrison v. National Australia Bank (2010), as a natural experiment to test the legal bonding hypothesis. By decreasing the potential liability of US-listed foreign firms, particularly due to class action lawsuits, Morrison arguably eroded their legal bonding to compliance with disclosure duties. Nevertheless, we find evidence of an increase or insignificant change in share values. Tests of longer-run effects of the legal event indicate that foreign firms’ disclosure quality and likelihood of facing enforcement actions remained stable, as did investors’ revealed preferences for trading on US markets. These results go against the legal bonding hypothesis but are consistent with reputational bonding and with market-based accounts of US cross-listing. Our results may contribute to ongoing debate about civil enforcement of securities laws through class actions.

Keywords: bonding, class actions, cross-listing, corporate governance, civil liability, reputation

JEL Classification: G15, G18, G38

Suggested Citation

Licht, Amir N. and Poliquin, Christopher and Siegel, Jordan I. and Li, Xi, What Makes the Bonding Stick? A Natural Experiment Testing the Legal Bonding Hypothesis (August 27, 2017). Journal of Financial Economics (JFE), Forthcoming; ECGI - Finance Working Paper No. 524/2017; Harvard Business School Strategy Unit Working Paper No. 11-072. Available at SSRN: https://ssrn.com/abstract=1744905 or http://dx.doi.org/10.2139/ssrn.1744905

Amir N. Licht

Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-952-7332 (Phone)
952-9-9513323 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
952-9-9513323 (Fax)

HOME PAGE: http:/www.ecgi.org

Christopher Poliquin

Harvard Business School ( email )

Soldiers Field Road
Wyss House
Boston, MA 02163
United States
207-415-0546 (Phone)

Jordan I. Siegel (Contact Author)

University of Michigan ( email )

Ann Arbor, MI
United States

Xi Li

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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