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

Massimo Massa (), Xiaoqiao Wang (), Bohui Zhang () and Hong Zhang ()
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Massimo Massa: INSEAD
Xiaoqiao Wang: The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)
Bohui Zhang: The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen)
Hong Zhang: Singapore Management University

Journal of International Business Studies, 2025, vol. 56, issue 1, No 6, 62-83

Abstract: Abstract 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.

Keywords: Lawsuits; Class action; Governance; Valuation; Corporate financial policy (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1057/s41267-024-00746-y

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