The Boundaries of Law: Can US Private Enforcement Discipline Foreign Firms?

We examine whether US shareholder-initiated class action lawsuits can discipline foreign firms. Using an international sample of firms over the period 1995-2018, we find that a US class-action lawsuit against a foreign firm cross-listed in the US negatively affects the value of its non-US-listed industry peers in home country. We uncover two economic mechanisms underlying this effect: information sharing and policy coordination between the US and the firm's home country. Moreover, foreign 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.