What Makes the Bonding Stick? A Natural Experiment Involving the U.S. Supreme Court and Cross-Listed Firms
On March 29, 2010, the U.S. Supreme Court signaled its intention to geographically limit the reach of the U.S.securities antifraud regime and thus differentially exclude U.S.-listed foreign firms from the ambit of formal U.S.antifraud enforcement. We exploit this legal surprise as a natural experiment to test the legal bonding hypothesis—namely, to assess firms’ ability to use other countries’ enforcement institutions as institutional substitutes and, more broadly, to assess the value of the U.S. legal enforcement mechanism. This event nonetheless was met with indifferent or positive, but not negative, reactions. Among other things, we find insignificant or positive abnormal returns using Brown-Warner, matched samples, and portfolio analyses, a reduction in the price premium for U.S.-traded equities, and little change in bid-ask spreads or the proportion of U.S.trading volume. These results challenge the view of at least the U.S.civil liability regime, as currently designed, as a source of value for such firms and warrant closer examination of the operation of formal enforcement institutions.