Private Litigation Risk and the Information Environment: Evidence from Cross-Listed Firms

• In Event: Risk and Related-Party Disclosures

Abstract

We use a natural experiment, the Supreme Court Ruling in Morrison v. National Australia Bank and the subsequent Dodd-Frank Act, to isolate and examine whether and how expected private litigation costs affect voluntary disclosure behavior. The Morrison decision applied a presumption against extraterritoriality for all securities actions. Congress quickly responded by exempting SEC actions through the Dodd-Frank Act, with the result that Morrison eliminates only private securities actions for shares purchased on non-US exchanges. These events lowered the expected private litigation costs for foreign firms cross-listed on US exchanges. We find a deterioration in voluntary disclosure for these firms relative to a matched sample of US firms. This effect is stronger for firms with weaker home country institutions. The evidence is consistent with firms responding to a reduction in expected private litigation costs by reducing public information.

Authors

• James Patrick Naughton, Northwestern University

• Tjomme O Rusticus, Northwestern University

• Clare Wang, Northwestern University

• Ira Yeung, Northwestern University