Cross-Listed Firms and Shareholder-Initiated Lawsuits: The Market Penalties of Securities Class Action Lawsuits against Foreign Firms

This paper examines the market penalties levied by shareholders against firms that are alleged to have violated securities laws within the U.S. Using a sample of private securities class action cases brought against foreign firms that cross-list on the major U.S. exchanges, this paper presents evidence that the enforcement risk criticism may not be as severe as initially thought. I examine market penalties at alleged violation disclosure dates and securities class action filing dates and find that each event corresponds to an economically and statistically significant loss of value for the accused firm. On average I find that the violation results in a loss of more than eighteen percent of market value, corresponding to an average of almost $600 million in dollars lost on the U.S. markets alone. When violation and filing date losses are taken together these losses average more than $700 million for foreign cross-listed firms. Further, an examination of the determinants of the reputational penalties assessed during this period indicates that reputational penalties are greater in cases where investors perceive the minority shareholder protection to be better in the home country.