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

Abstract

This paper examines the market penalties extracted by shareholders against firms that are alleged to have violated securities laws within the US. Using a sample of private securities class action cases brought against foreign firms that cross-list on the major US exchanges, this paper examines market penalties at violation disclosure, case filing, and settlement dates and finds 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 18% of market value, corresponding to an average of $575 million in dollars lost upon disclosure of the violation. When the disclosure, case filing, and settlement losses are combined, the losses average more than $740 million. More importantly, when compared to those of domestic firms, I find almost no significant differences in the market penalties of foreign and domestic firms at key dates around the violation of securities law. Further, an examination of the determinants of the reputational penalties assessed during the disclosure of a securities law violation indicates that reputational penalties are greater in cases where investors perceive the minority shareholder protection in the home country to be better.