The Boundaries of Law: Can US Private Enforcement Discipline Foreign Firms?

49 Pages Posted: 7 Apr 2020 Last revised: 29 Oct 2020

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Xiaoqiao Wang

The Chinese University of Hong Kong, Shenzhen

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Hong Zhang

Tsinghua University - PBC School of Finance

Date Written: July 04, 2020

Abstract

We examine whether US shareholder-initiated class action lawsuits can discipline foreign firms. Using an international sample of firms over the period from 1995 to 2013, we find that a US class action lawsuit against a foreign firm cross-listed in the US negatively affects the value of that firm’s home-country industry peers. We uncover two economic mechanisms underlying the disciplining effect of US lawsuits: information sharing and policy coordination between the US and other countries. We show that the loss of value for foreign peer firms’ prompts corrective corporate action to regain shareholder value by increasing the dividend payout and reducing cash holdings. Our findings confirm that private enforcement in the US can have worldwide consequences through US cross-listings.

Keywords: Lawsuits; Governance; Valuation; Corporate Financial Policy

JEL Classification: F36; G15; G23

Suggested Citation

Massa, Massimo and Wang, Xiaoqiao and Zhang, Bohui and Zhang, Hong, The Boundaries of Law: Can US Private Enforcement Discipline Foreign Firms? (July 04, 2020). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3555774 or http://dx.doi.org/10.2139/ssrn.3555774

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Xiaoqiao Wang

The Chinese University of Hong Kong, Shenzhen ( email )

Bohui Zhang (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

Hong Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://www.hongzhang.info

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