The Effect of Shareholder Litigation Risk on the Information Environment: The Case of Cross-Listed Firms

Abstract

I examine the effects of shareholder litigation risk on cross-listed firms’ information environment, as captured by information asymmetry. In order to disentangle the effects of shareholder litigation risk from those of confounding factors, I exploit a quasi-natural experiment in the form of a reduction in shareholder litigation risk resulting from the 2010 Supreme Court ruling in Morrison v. National Australia Bank. After the ruling, I document higher information asymmetry for cross-listed firms, especially for the firms with low US share activity. I also find higher information asymmetry in bad news firm-quarters and for firms from countries with weak legal institutions. I interpret my findings as evidence that shareholder litigation risk is an important factor in shaping the information environment. By implication, these findings suggest that improvements in foreign firms’ information environment upon listing in the US, as documented in prior literature, stem in part from the greater litigation risk associated with the US listing.