Impact of U.S. class action lawsuits on cross-listed foreign companies

Abstract

This study evaluates the short-term valuation impact of U.S. class action lawsuits by focusing on both sued and non-sued foreign companies listed in the United States. Using a comprehensive database that includes stock- and company-level information in both the U.S. and local home markets, I examine how private U.S. securities litigations affect the market value of both sued foreign companies and peer foreign firms not accused of wrongdoing. I find that during the event period surrounding the lawsuit-filing date, there is a significant negative stock price reaction for the sued foreign companies. Moreover, investors also tend to react negatively towards non-sued foreign issuers during this period. The logistic regression results also suggest that the determinants of lawsuit propensity are similar for foreign firms cross-listed in the U.S. and U.S. domestic companies. Finally, certain firm-, lawsuit-, and country-level characteristics can explain the degree of stock market reactions. The overall results provide evidence that private class action lawsuits in the U.S. have economically significant impact on cross-listed foreign issuers, thus playing an important role in overseeing and disciplining foreign companies.