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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Massimo Massa & Xiaoqiao Wang & Bohui Zhang & Hong Zhang, 2025. "The boundaries of the law: can US private enforcement discipline foreign firms?," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 56(1), pages 62-83, February.
  • Handle: RePEc:pal:jintbs:v:56:y:2025:i:1:d:10.1057_s41267-024-00746-y
    DOI: 10.1057/s41267-024-00746-y
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