The Boundaries of Law: Can US Private Enforcement Discipline Foreign Firms?
49 Pages Posted: 7 Apr 2020 Last revised: 29 Oct 2020
Date Written: July 04, 2020
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: Suggested Citation