The boundaries of the law: can US private enforcement discipline foreign firms?

Existing studies tend to focus on how a legal system reinforces the efficiency of its domestic firms or foreign companies that are subject to its domestic jurisdiction (e.g., via cross-listing). Our study provides critical normative implications in the era of financial globalization by showing that...

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Bibliographic Details
Published in:Journal of international business studies Vol. 56; no. 1; pp. 62 - 83
Main Authors: Massa, Massimo, Wang, Xiaoqiao, Zhang, Bohui, Zhang, Hong
Format: Journal Article
Language:English
Published: London Palgrave Macmillan UK 01.02.2025
Palgrave Macmillan
Subjects:
Academic disciplines
Action
Action control
Analysis
Artificial intelligence
Borders
Boundaries
Business
Business and Management
Business Strategy/Leadership
Class action lawsuits
Companies
Coordination
Courts
Efficiency
Enforcement
Financial institutions
Foreign companies
Global economy
Globalization
Governance
Industrial enterprises
Information dissemination
Information sharing
International Business
International finance
Jurisdiction
Legal institutions
Legal system
Litigation
Management
Market shares
Markets
Organization
Peers
Personnel policies
Researcher subject relations
Securities markets
Spillover effect
Statistical methods
Stockholders
Valuation
Value
United States > US
Corporate financial policy
Governance
Lawsuits
Valuation
Class action
ISSN:0047-2506, 1478-6990
Online Access:Get full text
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Summary:Existing studies tend to focus on how a legal system reinforces the efficiency of its domestic firms or foreign companies that are subject to its domestic jurisdiction (e.g., via cross-listing). Our study provides critical normative implications in the era of financial globalization by showing that the influence of a country’s legal institutions extend beyond its territorial boundaries. We examine whether US shareholder-initiated class action lawsuits can discipline non-US firms. Using an international sample of firms over the period 1994–2019, we find that a US class action lawsuit against a non-US firm cross-listed in the US negatively affects the value of its non-US-listed industry peers. The effect is robust in both event-based analyses for short-term market reaction and stacked difference-in-difference analyses for long-term valuation. We uncover two economic mechanisms underlying this effect: information sharing and policy coordination between the US and the non-US firm’s home country. Specifically, the cross-border disciplining effect is more pronounced for firms from countries that lack information and that coordinate with the US at the policy level. Moreover, non-US peer firms subsequently improve their governance practices and financial policies to restore shareholder value. Our findings suggest that private enforcement in the US has a worldwide influence.
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ISSN:0047-2506
1478-6990
DOI:10.1057/s41267-024-00746-y