| HBS Working Paper Series
Securities Litigation Risk for Foreign Companies Listed in the U.S.
We study securities litigation risk faced by foreign firms listed on U.S. exchanges. We take into account not only the propensity for foreign firms to commit violations of U.S. securities laws but also the costs that investors face when suing foreign firms. We find that U.S. listed foreign companies experience securities class action lawsuits at about half the rate as do U.S. firms with similar levels of ex-ante litigation risk. The lower rate appears to be attributable to higher transaction costs in uncovering and pursuing litigation against foreign firms. Once a lawsuit triggering event like an accounting restatement, missing management guidance, or a sharp stock price decline occurs, there is no difference in the litigation rates between a foreign and comparable U.S. firm. This evidence suggests that litigation risk of foreign firms is constrained by transaction costs, but the effect of transaction cost can be significantly reduced in the presence of quality information triggers that reveal potential misconduct of the firm.
Keywords: Litigation Risk;
Risk and Uncertainty;
Globalized Firms and Management;
Lawsuits and Litigation;