Spillover Effects from US Class Action Lawsuits: Evidence from Foreign Firms Cross-Listed in the US

Abstract

In this paper, we document that US cross-listed firms experience negative return spillovers in the three-day event window centered on the filing of US class action lawsuits launched against their country peers. This spillover effect is both economically large (-0.139%) and statistically significant at the 1% level. We find that firms domiciled in jurisdictions endowed with weak institutions, as well as firms monitored by weaker reputational intermediaries, are considerably more vulnerable to these adverse spillovers. Our evidence demonstrates that the mitigating power of external market monitors is especially high for firms domiciled in countries endowed with weak institutions. Foreign firms choosing to cross-list their shares in the US can reduce their vulnerability to this class action lawsuit spillover risk by selecting higher quality reputational intermediaries and by communicating with investors more effectively.

Keywords: Multi-market trading; cross-listed stocks; class action lawsuits; spillovers

JEL Classification: F30, G32, G15