The bonding hypothesis revisited: evidence from US class action lawsuits

Abstract

PurposeConsistent with an “absolute bonding hypothesis,” the benefits of listing on US exchanges experienced by cross-listed firms are accompanied by an increased risk of experiencing a spillover effect due to negative news within their industry. The purpose of this study is to test this form of the bonding hypothesis by analyzing the spillover effect to cross-listed firms when class action lawsuits are filed against their industry peers.Design/methodology/approachThe bonding hypothesis is tested by analyzing the spillover effect to non-sued cross-listed firms of class action lawsuits brought against US domestic firms in the same industry. The spillover effect is identified using cumulative abnormal returns around lawsuit filing dates from 1996 to 2020. A sample of matched non-sued cross-listed and domestic peer firms is evaluated in a cross-sectional analysis to identify country and firm-level characteristics that mitigate the negative spillover effect to cross-listed firms.FindingsWhile US firms realize significantly negative abnormal returns when class action suits are filed against their industry peers, the impact to cross-listed peers is statistically insignificant. In multivariate analyses, we show that the ability of cross-listed firms to avoid this negative spillover effect is stronger for firms with greater profitability that are headquartered in countries with better shareholder protections and governance characteristics.Originality/valueResults suggest that cross-listed firms may have a level of immunization from the negative industry spillover effect of class action lawsuits and, thus, exhibit only “partial bonding” to the US market.