Why Do U.S. Securities Laws Matter to Non-U.S. Firms? Evidence from Private Class-Action Lawsuits

Abstract

A continuing controversy is whether U.S. securities laws are enforced against foreign firms, since public enforcement actions by the SEC are infrequent and often result in insignificant penalties. We examine private enforcement actions of U.S. securities laws and find that 269 securities class-action lawsuits were filed against foreign firms from 1996 to 2008. We document the severity of the penalties imposed on foreign firms and show that while firms paid a total of $9 billion to settle lawsuits brought against them, the monetary penalties levied by the market are even larger. During the three-day period surrounding the lawsuit filing date, there is a significant negative stock price reaction of -6.16%, which translates to an average loss of $392 million dollars. Aggregating over all firms, the total dollar loss is $73 billion. Even foreign firms without significant U.S. assets experience significant valuation losses. Moreover, insiders of the firm bear direct financial losses through their shareholdings. Our results provide evidence that enforcement actions of U.S. securities laws against foreign firms are neither uncommon nor economically insignificant events.