The Valuation Impact of SEC Enforcement Actions
On Non-Target Cross-Listed Firms◊
Roger Silvers
University of Massachusetts
Pieter Elgers
University of Massachusetts
Abstract: The objective of this study is to provide a market-based test of the valuation
impact of legal bonding. We examine the Securities and Exchange Commission (SEC)
enforcement policy towards non-U.S. firms under its jurisdiction in the post-2002 time period.
In contrast to Siegel (2005) which examines earlier time periods, we find that the current
pursuit of non-U.S. firms by the SEC is by no means rare and is, in fact, active and significant.
We examine non-target cross-listed and foreign firm market returns using event windows
surrounding SEC announcements of enforcements against non-U.S. firms. These actions
isolate the effect of a changing legal environment and enable a test of the legal bonding
hypothesis that is not affected by self-selection problems or confounded by other factors such
as the information environment, liquidity, and market segmentation. The results indicate that
when the SEC takes action against a non-U.S. firm, non-target non-U.S. firms experience
substantial increases in market valuation. These positive effects are amplified for firms from
weak home legal environments, suggesting that the increases in value are due to closer legal
scrutiny by the SEC. In sum, the results provide evidence that legal bonding plays a
significant role in increasing the value of cross-listed firms.
Keywords: SEC, cross-list, foreign, legal bonding, insider trading, restatements
JEL codes: K22, G38, F22, F23, F59, M48
◊ We acknowledge Steve Perreault and Brooke Beyer as well as participants at the 2011 International Accounting
Section mid-year meeting and workshop participants at the University of Massachusetts. The usual disclaimers
apply.
1
1. Introduction
All firms electing to trade securities in U.S. markets fall under SEC jurisdiction,
including those domiciled in other countries and/or trading in foreign markets (see footnote
1).1 The literature has proposed several reasons why non-U.S. firms choose to list in U.S.
markets, most of which are associated with reducing the cost of financing (Stulz, 1999).2 The
ability of cross-listing to influence a firm‟s cost of capital has been explained by some via the
bonding hypothesis. This hypothesis proposes that firms listed abroad register in, and subject
themselves to the additional scrutiny of, U.S. markets in order to signal the firm‟s
commitment to quality financial reporting and investor protection (Coffee, 1999, 2002; Licht,
2003; Doidge, 2004). The pledge to meet the demands of the U.S. legal environment implied
by a U.S. listing allows companies to signal their credibility. Karolyi (2010), Hail and Leuz
(2009), Leuz (2006), and Benos and Weisback (2004) discuss the inherent difficulties in
testing the bonding hypothesis, and we propose that out research design can fill this void by
circumventing such shortcomings. Therefore, the objective of this manuscript is to provide a
market-valuation based test of the efficacy of bonding.
While some prior research supports the bonding hypothesis, other literature calls into
question the practical ability of cross-listed firms to bond to more stringent regulations. For
example, SEC's enforcement policy towards cross-listed firms has been described as a “free
pass” (Shnister, 2010), “rare” (Coffee, 2002, pg 47; 2007, pg 55), and "hands off" (Licht,
2003), while Licht et al. (2011) opine that “the rumors of the SEC‟s imminent threat of public
1 All firms that we examine trade in U.S. markets. For expositional convenience, we refer to the union of cross-
listed and non-cross listed foreign firms that are listed in U.S. markets as “non-US” firms in the remainder of the
paper. Foreign firms are those which are incorporated outside the U.S. but listed only on U.S. exchanges,
whereas cross-listed refers to firms that are first listed in a home market and secondarily listed on the U.S.
markets. 2 Other motives suggested by prior research include affecting business restructures (mergers), access to foreign
capital markets, greater liquidity, prestige, legal protection, brand recognition, and personal compensation
(Amihud and Mendelson, 1988; Karolyi, 1998).
2
enforcement have been greatly exaggerated.” In a study of cross-listed Mexican firms, Siegel
(2005) finds that SEC enforcement actions against these firms are lacking and suggests that
this trend extends to all non-U.S. firms.
Siegel‟s (2005) criticism of the SEC enforcement policy in the pre-2002 period
notwithstanding, the overall role played by the SEC in prosecuting non-U.S. firms is currently
active and significant. The terrorist attacks of September 11, 2001 increased the priority of
cross-border information sharing resulting in more intra-jurisdictional enforcement
cooperation. This has taken place domestically at the SEC and the Department of Justice and
around the world via the efforts of the International Organization of Securities Commissions
(IOSCO), Financial Action Task Force (FATF), and Financial Stability Forum (FSF)
(Friedman et al., 2002). These efforts may have prompted a meaningful change from the
ineffective regime documented by Siegel (2005) to aggressive extraterritorial enforcement by
the SEC in the post-2002 time period. Indeed, evidence from this study indicates that the SEC
currently pursues non-U.S. firms at a rate that is comparable with their representation in the
market. These enforcement actions are used in testing the legal bonding hypothesis in a
manner that is not confounded by factors that accompany secondary (cross) listing events,
such as self-selection bias or simultaneous changes to liquidity, shareholder base, market
segmentation, or the information environment.3
We examine the market valuation impact on non-target cross-listed firms of SEC
enforcement releases that charge a non-U.S. firm. Results indicate that in pursuing non-U.S.
3 Anecdotal evidence also suggests that SEC is a formidable power. Conrad Black, Chairman and CEO of
Hollinger International, a Canadian holding company for multiple national news syndicates, was pursued by the
SEC for fraud and self-dealing. He exclaims, “It also became clear that such was the weight of the onslaught of
the most powerful organization in the world, the US government, acting initially through the Securities and
Exchange Commission, but various other agencies became involved including the Internal Revenue Service, and
ultimately the Department of Justice. The pressures that it is possible for such an organization to bring are
extremely severe. They are stigmatizing, they are isolating, and they affect your life in ways that casual
observers wouldn‟t immediately imagine” (ideaCity06 Conference, 2006).
3
firms, the SEC actions confer significant positive abnormal returns to such cross-listed firms,
suggesting that legal enforcement boosts the value of non-U.S. firms. In economic terms, the
market valuation impact on non-target non-U.S. companies associated with the SEC
enforcement actions is considerable. Moreover, we find that the country of origin plays a
significant role in determining the magnitude of the reaction. Specifically, firms from
countries with weak legal environments have a greater positive response to SEC enforcement.
Taken together, these findings provide strong support of the legal bonding motivation for
cross-listing.
Various prior studies evaluating the bonding hypothesis examine the market response
to firm-specific announcement or consummation of cross-listings (Doidge et. al, 2004;
Karolyi, 2006; Stulz, 2009; Hail and Leuz, 2009).4 These efforts are plagued by an inability
to separate bonding from alternative explanations (e.g. risk premium reduction, market
segmentation reduction, changes in liquidity, or information disclosure). In contrast, the
available history of SEC actions toward non-U.S. firms allows a test of legal bonding while
avoiding such potential confounding factors.5 Consequently this study provides a direct test
of legal bonding that does not suffer from these alternative interpretations. In doing so, we
contribute to several concurrent debates about U.S. market competitiveness and optimal
regulatory structures by offering important evidence about the consequences of enforcement.
The paper proceeds as follows: Section 2 discusses background literature, and Section
3 develops the hypotheses. A description of the sample data is presented in Section 4.
4 One exception is Hail and Leuz (2008) who show that the valuation increase is not due exclusively to changes
in expectations of growth. Rather, this valuation increase is in part due to changes in the cost of capital.
Although their results are consistent with bonding, they emphasize that their paper is not an outright test of the
bonding hypothesis. 5 The support of legal bonding certainly does not exclude the possibility that alternative cross-listing
explanations are also relevant because these theories are not mutually exclusive.
4
Section 5 describes the research design and presents the empirical results. Section 6 offers
robustness tests to ensure that the results are not driven by our specification of expected
returns, and Section 7 concludes.
2. Background
Prior research generally supports the idea that cross listing intends to, and succeeds in,
reducing a firm‟s cost of capital. However, researchers have contrasting hypotheses about the
mechanisms by which this reduction takes place. Some suggest that the value of cross-listing
is a result of reduced market segmentation (Merton, 1987; Errunza and Losq, 1985).
However, although several studies document significantly positive abnormal returns around
secondary listing dates or announcement dates (Karolyi, 1998; Foerster and Karolyi, 1999;
Miller, 1999), the economic significance is often meager (Karolyi, 2011). Furthermore, the
patterns of abnormal returns persist for firms from well integrated markets (that is, with little
market segmentation). Stulz (1999) therefore argues that a firms cost of capital rests upon the
pillars of the legal system, capital markets, and regulations regarding disclosure, among
others. The ongoing debate therefore consists of two contending fundamental hypotheses:
bonding (or signaling) and avoiding.6
Avoiding proposes that cross-listing reduces market segmentation and that legal and
regulatory structures impose a costly burden. Cross listing therefore presents an investment
opportunity to a broader class of investors who were previously unaware of the firm (Merton,
1987; Karolyi and Stulz, 2002). This awareness increases access to capital and widens a
firm‟s shareholder base, thus promoting risk sharing via better dispersion of securities, and
6 Karolyi (2011) provides an excellent discussion about the evolution of the bonding hypothesis and its various
forms. Licht (2003) articulates the family of avoiding hypotheses.
5
thereby lowering the cost of capital (Foerster and Karolyi, 1999; Stulz, 1999). These benefits
have been demonstrated in both short- and long-run increases in value (Kadlec and
McConnell, 1994; Miller, 1999; Foerster and Karolyi, 2000).
In contrast, bonding asserts that shareholders benefit from cross-listing because cross-
listed companies are required to uphold higher standards of governance and disclosure than
their home markets require. Two types of bonding are proposed: legal bonding and
reputational bonding. The legal bonding hypothesis suggests that cross-listing signals a firm‟s
commitment to high-quality disclosure and investor protection thereby reducing agency costs
(Coffee, 1999, 2002; Doidge, 2004; Stulz, 2009). Under this view, cross-listed firms are
compelled by SEC mandates and the U.S. legal framework to protect minority shareholders
and improve their information environment, regardless of more lenient laws or practices in a
firm's home country.7
The reputational version of bonding asserts that, despite the lack of protection
purveyed by the U.S. regulatory and legal environment (Siegel, 2005), bonding may
nonetheless endure (Coffee, 2002). Indeed, Siegel (2005) finds in a study of Mexican cross-
listed firms that, although the firms are not forced to abide by the U.S. rules (legal bonding),
the act of voluntarily following the rules creates a “reputational asset.” Firms with insiders
who engage in illicit asset taking are less likely to receive outside resources (i.e. equity, public
debt, or syndicated loans) during economic hardships. Reputational bonding suggests that the
market itself, rather than the SEC, is the key driver of value by “routing out governance
abuses” (Siegel, 2005, p. 356).
7 Empirically consistent with this view, several studies demonstrate increased capital availability, valuation
premium, lower cost of capital, improved information environments, and higher quality financial reporting
associated with cross-listing (Reese and Weisbach, 2002; Doidge et al., 2004; Doidge, 2004; Ayyagari, 2004;
Doidge, et al., 2008; Lel and Miller, 2008; Hail and Leuz, 2009; Lang, et al. 2003; Lang et al., 2003).
6
Although severe lack of enforcement by the SEC and possible failure of the private
right of action lead Siegel to conclude that legal bonding cannot have a meaningful impact,
some research raises concerns about the methods used and conclusions drawn from Siegel‟s
study (Benos and Weisbach, 2004; Doidge, 2004; Leuz, 2006; Coffee, 2007). Leuz (2006)
and Coffee (2002) stress that legal bonding does not imply that scrutiny of cross-listed firms
and U.S. firms be equivalent. The necessary condition for legal bonding merely requires that
entry into U.S. markets provides incremental improvement in disclosure or minority
shareholder protection. Coffee (2002) goes on to point out that SEC oversight can take place
in a multitude of ways, including informal and unobservable contact. Furthermore, ad hoc
examination of specific SEC actions (or lack thereof) does not constitute an effective test of
bonding (Coffee, 2002; Benos and Weisbach, 2004).8
For several reasons, inferences from prior studies concerning the validity of bonding
and its various forms remain open for debate (Doidge, 2004; Leuz, 2006; Hail and Leuz,
2009, Karolyi, 2011). First, the effects of bonding and market segmentation reductions (the
key value driver for the avoiding hypothesis) are not mutually exclusive. Furthermore, legal
bonding and reputational bonding are also not incongruous. Second, research designs used in
prior studies are subject to causality issues (Karolyi, 2010). Because firms voluntarily elect to
cross-list, most designs, such as those that evaluate the effects of a cross-listing announcement
or consummation, are subject to self-selection issues. Moreover, simultaneous changes often
occur to firm-specific characteristics that coincide with the cross-listing that could exacerbate
8 Siegel‟s (2005) results indicate that of the illegal asset taking (Table 3, pg 336), only three firms are listed ADR
programs. The other firms are part of unlisted (level I) programs which are exempt from the majority of SEC
requirements (e.g. SOX compliance, reconciliation 20-F, size/earnings requirements). Given the increase in
subsequent SEC scrutiny documented later in this paper, the examination of SEC policy in more recent times is
prudent before proclaiming that the SEC does not take action against non-U.S. firms.
7
an omitted variable problem. For example, changes to firm size, capital structure, growth
opportunities, access to capital, liquidity, and disclosure quality obscure the root causes of
changes in valuation. Therefore it is extremely difficult to assign changes in valuation to one
specific catalyst.
The ideal test of legal bonding would observe the effects of an exogenous change that
is confined to the legal environment. As Siegel (2005) points out, a potentially critical but
deficient element of legal bonding is enforcement. Indeed, several papers opine about the
vital role of enforcement activity in obtaining compliance with existing regulations (Coffee,
2007; Christensen, Hail, and Leuz, 2011), but enforcement intensity is empirically difficult to
capture. Bhattarcharaya and Daouk (2002) document that the cost of equity capital is
unaffected by the passage of insider trading prohibitions, but is associated with a reduction
following the enforcement of the first prosecution. Coffee (2007) suggests that tangible
outputs of regulators (fines, number of actions, criminal sanctions, etc.) may be an important
factor related to market development (although he hastens to emphasize the potentially
endogenous nature of cross-sectional association of market development and enforcement).
Jackson and Roe (2009) proxy for enforcement intensity by measuring enforcement-related
inputs (resources) across countries. Their results demonstrate that public enforcement is at
least as important in explaining financial market development around the globe.
We identify a regime shift in the intensity of enforcement by the SEC (described in
detail in Section 4) that provides a tractable opportunity to evaluate the bonding hypothesis
while circumventing selection issues. Presumably the market sentiment during the pre-2002
time period reflects the “hands off” policy documented by Seigel (2005), but, as a matter of
national security, this policy shifted dramatically in response to the events of September 11,
8
2001. Both the Department of Justice and the SEC established more formal mechanisms that
promoted cross-border cooperation and anti-terrorism intelligence (by way of Multilateral
Legal Assistance Treaties (MLATs) and the Multilateral Memorandum of Understanding
(MMOU), respectively). The MMOU outlines the scope of the international assistance,
permissible uses of the information acquired, and explicitly states conditions under which the
information will be confidential (Friedman, et al., 2003).9 Importantly, the MMOU does not
require that the activities be illegal in both countries (dual criminality), and establishes
channels through which the SEC can execute asset freezes (see
http://www.sec.gov/news/press/2010/2010-153.htm).
3. Hypothesis development
The legal bonding hypothesis suggests that firms benefit from signaling their superior
reporting quality by withstanding the scrutiny of the SEC.10
Legal bonding requires that the
oversight of the SEC and the threat of enforcement be sufficient to reduce investor
perceptions of risks (e.g. risks decline due to an increased cost of rogue management behavior
(Zimring and Hawkins, 1973)). Indeed, Kedia and Rajgopal (2011) demonstrate that the
propensity to engage in rogue behavior is inversely related to enforcement threat salience
(measured by historical county-level SEC enforcement). Accordingly, we expect that non-
U.S. firms are a relevant peer group used by both firms and the market to assess enforcement
oversight. If the market perceives that the SEC is providing scrutiny of non-U.S. firms that
would otherwise not be held to such standards, the potential for legal bonding exists.
9 The SEC obtained an exemption from the U.S. Freedom of Information Act (amended, 2002), to ensure that
after a foreign regulator surrenders information, its public disclosure is still at the discretion of the original
regulator. 10
The legal system as a whole is the critical element, but the SEC ostensibly plays a sizeable role as the most
powerful financial regulatory body in the U.S. legal landscape.
9
However, we again note that legal bonding does not imply that scrutiny of cross-listed firms
and U.S. firms be equivalent (Leuz, 2006; Coffee, 2002). As Leuz (2006) points out “[the
bonding hypothesis] only maintains that the U.S. cross listings provide some additional
reassurance to outside investors.”
To test the bonding hypothesis, we first examine the market response of non-target
cross-listed firms to SEC actions against non-U.S. firms, and then study the association
between home country legal characteristics and the magnitude of the market response. The
theoretical grounds for our expectations relate to legal bonding, which is classically pertinent
to cross-listed firms. However, extraterritorial SEC oversight of both cross-listed and non-
U.S. firms was once deficient and has subsequently expanded. Therefore, to the extent that
the market considers extraterritorial SEC enforcement actions relevant to both subsets of firms
(cross-listed and foreign firms), we expect similar valuation consequences. Accordingly, we
include analyses of foreign firms (both in terms of SEC actions and non-target response firms)
in the following sections (see footnote 1 for important definitions of cross-listed, foreign, and
non-U.S. firms).
In the pre-2002 time period examined by Siegel (2005), pursuit of non-U.S. firms was
rare, despite compelling evidence of asset taking by Mexican firm insiders. However, a recent
SEC regime shift that motivates enforcement of cross-listed firms may amplify the effects of
legal bonding. For example, in August of 2002, Gary Goodenow, an attorney at the SEC‟s
Division of Enforcement described the practical level of enforcement cooperation: “The SEC
and other regulators…have only very recently begun considering information sharing between
financial regulators” (Vaknin, 2002). Market awareness can also be demonstrated by
PriceWaterhouseCoopers‟ 2003 Securities Litigation Study which observes that “the SEC
10
entered into new cooperation agreements with the European Union and various EU countries‟
securities regulators, as many more securities litigation matters went „global‟”
(PriceWaterhouseCoopers, 2004, pg 2). However, because the SEC never provided an official
“free pass” to non-U.S. firms, a publicly expressed amendment to this policy is a tacit
admission that a “hands off” policy was applied in the past, which is inconsistent the SEC‟s
mission. We neither expect nor find an explicit announcement that the extraterritorial policy
changed, although in Section 4 we demonstrate that the practical enforcement of non-U.S.
clearly increases.
The SEC has entered into similar information sharing agreements in the commission‟s
history, with little observable impact. Therefore, investors may be skeptical of the practical
effects of the MMOU information sharing agreement. For example, the SEC‟s Policy
Statement on Regulation of International Securities Markets, formally emphasizing the
importance of cross-border regulatory networks, had been in place since 1988, but resulted in
the relatively weak oversight documented by Siegel (2005). Furthermore, while the IOSCO
requires a review panel that ensures that MMOU members are capable of fulfilling the terms
and conditions therein, there is nothing legally binding about the MMOU, and the right to
refuse to cooperate is at the discretion of the foreign authority.
As a result, the market valuation effects of such a regime shift require evidence of
specific actions for the market to resolve uncertainty concerning the actual pace and scope of
the more aggressive SEC enforcement policy. Therefore, notification that the SEC has
successfully performed this function by pursuing a non-U.S. firm may cause market
participants to revise or reaffirm their prior beliefs about the standard to which non-U.S. firms
are held. The cost of consuming private benefits in non-U.S. firms concomitantly increases
11
(and becomes more salient), creating additional deterrents to wrongdoing and reminding the
market that non-U.S. firms are not beyond the reach of the SEC (Becker, 1968; Jennings,
Kedia, and Rajgopal, 2011). If investors perceive that the monitoring role of the SEC has
expanded, positive returns to non-target non-U.S. firms may result. This reason motivates the
first hypothesis (stated in alternative form):
H1: Around the dates of SEC enforcements against non-U.S. firms, abnormal
returns to non-target non-U.S. firms will be positive.
Under the bonding hypothesis, one major driver of increased value for cross-listed
firms is the commitment to higher legal, governance, and investor protection standards, all of
which are under the jurisdiction of the SEC. Ultimately, SEC actions generate larger marginal
benefits to firms with the most room for improvement. For example, companies from
developing countries with poor investor protection (i.e. weak legal systems, disclosure
mandates, and anti-director rights) are likely to experience the largest cross listing benefits
(Miller, 1999; Doidge, et al. 2004; Doidge, 2004). Also, Doidge, et al. (2007) show that firm-
level characteristics have little impact on governance scores in under-developed markets
beyond country-level characteristics. This suggests that firms from countries known for poor
governance may be unable to change investor sentiments through increasing their governance
practices alone and are therefore likely to experience the largest marginal impact from SEC
scrutiny. Hail and Leuz (2009) show that the reduction in the cost of equity capital provided
by cross-listing (after controlling for changes in expected growth) is greater for firms
domiciled in weak home regulatory environments. Taken together, these results suggest that
12
if bonding drives returns around SEC enforcements of non-U.S. firms, those firms which are
cross-listed in countries with the weakest financial environments should reap the largest
benefits.11
This reasoning leads to the second hypothesis (in alternative form):
H2: The legal strength of firms’ home countries is inversely related to the market
value impact of SEC enforcement action for non-target cross-listed firms.
(H3) agreements
4. Sample
4.1 Enforcement sample
Data for the sample is collected from multiple sources pertaining to insider trading-
and restatement-related SEC enforcement actions over 14 years (1995 to 2008). We split the
sample into two 7-year periods (1995-2001 and 2002-2008) because Siegel (2005) shows that
SEC actions are sparse in the earlier period.12
The Securities and Exchange Commission annual reports provide a description of
insider trading enforcement actions. We collect measures of a host of pertinent characteristics
for each insider trading release including: the total amount of illegal gains, the length of the
announcement delay, whether the trade involved a merger or acquisition, and whether the case
11
Note that these arguments do not necessarily extend to foreign firms who are fully listed solely in U.S. markets
because their legal environments are ostensibly the same as a U.S. domiciled firm. Current research has not
examined whether there is a “stigma” for foreign firms from weak home legal institutions that are listed in U.S.
markets, although this effect has been documented for cross-listed firms (see Zhu, 2009). 12
Also, we expect that the establishment of the IASB in 2001 and the 2002 agreement between the FASB and the
IASB to work toward convergence may facilitate changes in the international affairs policy at the SEC. In
addition, the SEC budget increased by 21% in 2002 and 40% in 2003, the largest two increases during the 14-
year period.
13
was settled at the time of the release.13
Table 1 Panel A describes the sample of 333 total
insider trading enforcement actions brought against firms and their insiders.14
Over the entire
sample period, non-U.S. firms represent 11.7% of the cases (39/333), of which 8.7% are
cross-listed and 3.0% are foreign. The frequency and percentages of non-U.S. enforcements
in Panel A do not change radically from the 1995-2001 to the 2002-2008 partition.15
We also gather restatement data from the SEC website, Audit Analytics database, and
the GAO database from 1995 to 2008 on all public restatements and financial reporting
infractions. We include SEC-prompted restatements only and do not include restatements due
to mergers, acquisitions, stock splits, or other sanctioned business reporting that arise from
unusual, but legitimate, operations (Hennes, et al. 2008). We assemble the date the
restatement is announced, the dates covered by the restatement period (sometimes referred to
as the class period), whether the restatement involved fraud, and the restatement amount
(scaled by market value of equity). Table 1 Panel A describes the resultant sample of 779
available restatements, of which 66 are non-U.S. firms. The fraction of non-U.S. SEC
enforcement actions dramatically increases from 2.4% during 1995-2001 to 10.6% during
2002-2008. The 34 cross-listed firms account for 4.4% of all restatements in the entire sample
period (1995-2008). In contrast to the insider trading sample, non-U.S. restatements have
13
To be included in the insider trading sample the SEC must pursue a firm, or firm insider. Almost 40% of the
enforcement cases represent SEC pursuits of individuals that are not insiders of (employed by) any specific firm
and are therefore excluded. 14
Analyses by firm rather than by enforcement action (unreported) buttress the notion that enforcement actions
against non-U.S. firms are far from rare, and ensure that results are not driven by multiple litigation releases for
the same firm. For example, insider trading cases from 2000-2008 show that the total number of companies
pursued by the SEC is 237. Of the 237 total target firms 21 are cross-listed and 10 are foreign. 15
In the following section, we show that the representation of non-U.S. firms as a fraction of SEC enforcement
actions is in line with non-U.S. firms‟ representation in the markets as a whole.
14
increased remarkably both in frequency and as a percentage of all SEC-prompted
restatements.16
Panel A of Table 1 also shows additional SEC enforcements against 17 non-U.S. firms
that are not readily classified. These miscellaneous infractions include actions such as tax
evasion, aiding and abetting other companies committing fraud, and false disclosures
(unrelated to financial statements). Many of these events involve significant fines, which
average over 70 million dollars.17
We collect the amount of such fines and the dates the
alleged crimes were committed. The final combined sample of 122 non-U.S. actions in Table
1 Panel A represents 39 insider trading, 66 restatement, and 17 miscellaneous enforcement
actions. Enforcement of listed securities is more than 5 (4) times as likely for insider trading
(restatement) actions. This lack of enforcement intensity may contribute to the reduced
benefits of cross listing on cost of capital documented by prior literature (Hail and Leuz,
2009).
4.2 Universe of non-U.S. SEC-regulated firms
To facilitate a better understanding of the frequencies presented in Table 1 Panel A,
we collect data to describe the representation of non-U.S. firms listed in U.S. markets by
exchange listing destination (that is, the second exchange upon which the firm lists).18,19
Data
is obtained via the Bank of New York, OTC Bulletin Board, NASDAQ, and NYSE/AMEX
16
Although these results are similar to Shnister (2010), she concludes that the SEC pursuit of cross-listed firms is
lower than that of domestic firms. Her results are in part driven by not recognizing the regime shift in 2002, and
heavily influenced by failing to evaluate exchange listed firms separately from non-exchange-listed firms. 17
See, for example, http://www.sec.gov/litigation/litreleases/2006/lr19716.htm. 18
Hereafter, “listed” securities represent those trading on a major U.S. exchange (such as the NYSE). These
firms correspond to Level II and III American Depositary Receipts (“ADRs”). In contrast, “unlisted” refers to
the OTC markets, which includes Level I and rule 144A cross-listings. 19
Because the miscellaneous infractions are not clearly classified into a category, we do not report comparable
domestic SEC actions.
15
websites and is cross-validated by information from the SEC website. Table 1 Panel B,
provides the composition of the universe of U.S. markets in percentage terms by type of
listing and listing destination (for example, the 17.8% represents over 2,000 non-U.S. firms in
U.S. markets as a percentage of roughly 11,000 total SEC regulated firms). The cross-listed
fraction of the sample is comparable to that reported by Reese and Weisbach (2002). Table 1,
Panel B also reports non-U.S. firms as a percentage of corresponding SEC enforcement
actions in the period from 2002-2008.20
The enforcement proportions reported in Table 1, Panel B are inconsistent with the
view that the SEC abdicates its responsibility for non-U.S. firms. Enforcement against listed
non-U.S. companies as a percentage of total enforcement is generally comparable to the non-
U.S. representation in listed markets. For listed securities, the cross-listed insider trading
enforcement actions by the SEC (8.33%) exceed the underlying representation of cross-listed
firms in the market (5.6%). The only major deficiencies in enforcement activity in
comparison to the underlying representation are found in the OTC market. The OTC under-
representation of non-U.S. firms in SEC enforcement actions is perhaps not surprising given
prior research, which shows that the SEC radar for illegal actions appears attenuated for
unlisted firms (Miller, 1999; Coffee, 2002; Lang, Raedy and Yetman, 2003; Doidge, et al.,
2004, 2008; Hail and Leuz, 2009).
The data summarized in Table 1 provide descriptive evidence that the detection and
pursuit of firms in less prestigious (OTC) markets is, not surprisingly, reduced.21
Consistent
with prior literature and the reduced regulatory and disclosure requirements for such listing
20
For example, the 8.97% represents 14 SEC insider trading enforcement actions against cross-listed firms that
took place from 2002-2008 as a percentage of the 156 total insider trading cases from that time period. 21
Coffee (2002, p 35) states, “In short, from a corporate governance perspective, little of significance happens
when only a Level I [unlisted/OTC] facility is created; there is no upgrading in the quality of financial disclosure
and no bonding of any consequence.”
16
types, the information demonstrates that listing type does matter. Given the empirical support
for the SEC‟s disciplinary role in regulating cross-listed firms, it is not appropriate to dismiss
the SEC‟s role in regulating non-U.S. firms as inactive, laissez-faire, inconsequential, or
nonexistent.
The information in Table 1 should be interpreted cautiously in assessing SEC
enforcement equality because the groups may have differences in the underlying frequency or
severity of misconduct, as well as the fact that the home country may share a portion of the
regulatory burdens with the SEC. Although this evidence is useful in informing the
contemporary understanding of cross-listing, the descriptive properties are ad hoc in nature.
However, the panels are striking in light of assumptions made by prior research (Licht, 2003;
Siegel, 2005; Licht et al., 2011; Shnister, 2010).
5. Research design and empirical results
5.1 Introduction
The hypothesis tests are presented in the following two sections. First, we examine
the magnitude and timing of the market response using a portfolio-based event study
framework (H1). Second, we assess the home country characteristics that condition the
market response at the firm level using a cross-sectional regression framework (H2).
5.2 Portfolio CAR
If the SEC has historically been inactive in the monitoring of non-U.S. firms (Siegel,
2005), and subsequently increases the level of monitoring, we expect that the market for the
securities of non-U.S. firms will benefit because SEC scrutiny reduces the cost of external
17
monitoring and increases the cost of insider malfeasance. Both of these effects should
enhance firm value for outside shareholders. H1 assumes that investors benefit from legal
actions against non-U.S. firms (i.e. legal bonding) and that investors are aware of SEC actions
towards non-U.S. firms.
Muradoglu and Huskey (2008) and Salavei, et al. (2009) examine the market response
of target firms to SEC enforcement actions and find that such firms experience significant
negative abnormal returns that accompany SEC announcements. These returns to target firms
begin around day -1 and change little after day +8 relative to the announcement date.
Accordingly, we choose to examine 10-day (-1, +8) returns to a portfolio of non-U.S. firms on
U.S. stock exchanges as the event period return window. We also report the anticipatory
period (-14, -2) and the subsequent period (9, 16) returns. We measure abnormal returns as
market adjusted returns using a value-weighted index, although similar to Leuz, Triantis, and
Wang (2008) our results are similar using a variety of abnormal return specifications, detailed
in Appendix A. The number of events is reduced from the sample of 122 enforcements to 94
(30 insider trading, 50 restatement, and 14 miscellaneous activities) for reasons described in
Appendix A. We use the universe of foreign and cross-listed firms covered by CRSP to form
equally-weighted portfolios at each SEC action date because there are roughly 75,000
observations (firm-events) available in CRSP (see Appendix A for details). This approach
mitigates potential cross-sectional dependencies that could bias the standard error estimates
(Sefcik and Thompson, 1986). The 94 portfolios constructed for each unique SEC
enforcement action date assume that different events are uncorrelated, which is not
unreasonable given the random nature of the enforcement announcement dates (see Figure 1).
Standard errors are estimated using an approach similar to Fama and MacBeth (1973).
18
Figure 1 displays the 94 portfolio returns to enforcement announcements over time by
type of enforcement. The number of SEC actions targeting non-U.S. firms increased sharply
around 2002. Figure 2 shows the daily Cumulative Abnormal Return (CAR, hereafter) for the
anticipatory, event, and subsequent periods. The graphical results appear consistent with the
view that the enforcement announcement positively affects market returns. Table 2 provides
statistical evaluations of the market reaction to SEC actions against non-U.S. firms based on
event portfolios. Panel A reports the anticipatory, event, and subsequent period returns and
buttresses the inference in Figure 2. The anticipatory (day -14 to -2) and subsequent period
(9, 16) returns are insignificant while the event period (-1, 8) returns are positive and
significant, consistent with H1. Non-U.S. firms appear to benefit from the SEC action by
about 0.72% over the 10-day window. The results are economically and statistically
significant and comparable in magnitude to prior research (Gleason, et al. 2008; Armstrong, et
al. 2010). The Bank of New York estimates that in 2008 the NYSE and NASDAQ held 1.2
trillion dollars of market capitalization for cross-listed firms (BNY, 2009), making 0.72% an
impressive increase in dollar value.
Panel C of Table 2 partitions firms by the type of violation (insider trading,
restatement, and miscellaneous). The abnormal returns in each partition and are again tested
at the portfolio level and the abnormal return estimates for all three types are positive in the
2002-2008 partition. The lack of statistical significance for the insider trading and
miscellaneous partitions is likely due to a lack of power afforded by the portfolio design
(which provides 30 and 14 observations, respectively). The restatement partition has 50
observations which permits the tests to reach statistical significance at conventional levels.
Overall, Table 2 provides support for H1.
19
5.3 Cross-sectional regression analyses of firm-specific abnormal returns
Results shown in Table 2 indicate that non-target foreign firms listed on U.S.
exchanges experience a significantly positive increase in value when the SEC takes financial
reporting or insider trading actions against other non-U.S. firms.22
Given the significant
response at the portfolio level reported in Table 2, it is potentially informative to explore both
event- and firm-specific characteristics that may influence the magnitude of the market
response to SEC enforcement actions.
Country specific factors may contribute to the market value implications of SEC
enforcement actions. H2 posits that returns for cross-listed firms are conditioned by their
home legal environments such that greater returns accrue to firms with weak home country
origins. The empirical results are developed in two stages. In the first stage, we regress firm-
event specific (-1, 8) CARs of the non-target firms on firm-specific attributes (such as size
and listing type) and enforcement event-specific variables (meant to capture the egregiousness
of the violation) as well as size (to control for visibility) and listing status of the target firm.23
We also include year and firm fixed effects to control for residual dependencies. The first
stage purges abnormal return variance that can be ascribed to characteristics other than the
main variables of interest. The residual from the first regression, orthogonal CAR (OCARei),
is the dependent variable for the second stage regression. The second stage relies upon
indices used in La Porta, et al. (2006) (LLS, hereafter) to measure country environmental
factors that, under the bonding hypothesis, would be expected to condition abnormal returns.
22
We continue to report the results from the miscellaneous category for completeness. 23
Additional details describing the first stage regression variables and results are found in Appendix B. Results
are equivalent when exploring the relation in one stage.
20
We run separate regressions for the cross-listed and the foreign samples. Despite their
similarities in terms of non-U.S. incorporation, these two distinct groups may have
fundamental differences in the way that SEC actions are interpreted. Such differences may
arise because they likely vary in terms of the information environment, risk profile, and
fundamental reasons for choosing a U.S. listing (see footnote 13). We also allow for a
differential effect of insider trading, restatement, and miscellaneous investigations by further
separating regressions by type of enforcement. This procedure yields 6 distinct regressions.24
We regress OCAR on a set of indices developed by LLS (2006) that are intended to
capture legal origin, corruption, private enforcement, and various measures of the public
regulatory environment. The regression results are reported in Table 3. Consistent with H2,
the abnormal returns of the cross-listed firms exhibit a significant inverse relation to the
indices, indicating that those countries with the weakest financial reporting environments
serve to benefit the most from the expanding SEC oversight. The variables English Law and
Class Action in Panel A are binary, and facilitate simple interpretation. The returns to
countries of English legal origin (stronger legal systems) are less than their weaker legal
origin counterparts by a about .55%. Class action is more pertinent for explaining insider
trading enforcement return variation and shows that countries without class action at their
disposal reap an additional .39% over the 10-day return interval.
The bonding hypothesis implies that financial reporting enforcement-related returns
should be most sensitive to the Disclosure Requirements, Order, and Efficiency of Judiciary
24
Results of the first stage regression are shown in Appendix C which indicates that the overall significance of
the regression is high with F-values ranging from 8.33 to 31.01. The explanatory power as measured by
adjusted-R2 ranges from 1.66% to 2.80%, which is similar to prior research (Gleason, et al., 2008). Reported
results pool observations from the pre- and post-2001 time periods, but results are similar when restricted to the
post-2001 period.
21
indices.25
Panel B of Table 3 shows coefficient estimates that are significantly negative for
each of these variables indicating that firms from the weakest home legal environments garner
the greatest marginal benefit from the SEC enforcements. Insider trading enforcement return
variation should be most readily explained by Supervisor Characteristics (i.e. regulatory
characteristics), and Investigative Powers. This pattern is also supported by the negative
coefficients in Panel B.
As in other analyses, the miscellaneous partition results differ from the other two
partitions. Results indicate that the foreign firm sub-sample is less sensitive to home-country
characteristics (of the six indices that are significant for foreign firms, five are contrary to
expectations).
Overall, the negative relation between home country legal strength and abnormal
returns shown in Table 3 suggests that the firms from weak home legal environments
experience the greatest marginal benefit from increased SEC oversight, supporting H2 and the
legal bonding hypothesis. This is consistent with Miller (1999), Doidge, et al. (2004), and
Doidge (2004) who show that home country characteristics similarly condition the benefits
demonstrated at the time of the cross listing. Extending their work, our results distill the
effects of legal bonding in isolation by excluding the potential for selection problems or
simultaneous changes in liquidity, market segmentation, etc. that may be associated with the
cross-listing event.
6. Robustness and additional tests
6.1 Robustness tests of the abnormal return (CAR) specifications
25
The nature of the LLS (2006) index construction does not facilitate intuitive interpretation of the magnitude of
the coefficients. However, the sign and statistical significance enable assessment of whether the marginal benefit
of expanded SEC oversight is greater for firms in weaker home legal environments (H2).
22
Our specification of abnormal returns presumes that foreign firms do not have omitted
risk characteristics that are determinants of expected returns. In order to give closer
inspection to the potential impact of alternative specifications of abnormal returns, we follow
Armstrong, et al. (2010) by comparing returns during event period dates to randomly assigned
dates. If the abnormal returns in event periods significantly exceed those in non-event
periods, we have additional confidence that the results documented in this paper are not driven
by misspecification of expected returns.
In order to test abnormal returns around randomly assigned dates, we calculate the (-1,
8) 10-day abnormal returns to non-U.S. firms for each trading day from 1995 to 2008. We
then select 94 days at random, and repeat this sampling method 1,000 times. This approach
has the advantage of requiring no assumptions about the distributional properties of the
abnormal portfolio returns. Of the 1,000 portfolio returns using randomly assigned dates,
none reach portfolio returns as great as the .72 % achieved using actual event dates (simulated
p<.001). The average of the simulated returns is -.000041%. These simulation results
indicate that the market adjusted returns used in our primary tests are well specified. In
additional analyses (not tabulated) we stratify the simulation to ensure that the random sample
represents the year-by-year SEC enforcement sample and inferences are unchanged.
6.2 Intertemporal comparisons of market reaction to enforcement events
Consistent with legal bonding, results indicate that SEC enforcement actions increase
the security values of non-target cross-listed firms and that such returns are greatest in firms
from weak home legal environments. These results imply that a change in the expectation of
the SEC‟s enforcement policy is a contributor to the market‟s valuation of a firm. One would
23
expect that the initial enforcements in a new enforcement regime cause the greatest revisions
in the market expectations and consequently the greatest changes in valuation. Therefore, we
present portfolio-level intertemporal contrast results both for the entire sample and separately
for each of the three subsample (insider trading, restatements, and miscellaneous) of
enforcement actions. The separate analyses are presented because we expect that the
restatement enforcement activities represent the focus of the regime shift (see Table 1, Panel
A). We first identify the surge in SEC enforcement actions in the year 2002 as the beginning
of a new enforcement regime. Next we partition the sample based on time of occurrence (i.e.
the earlier period and later periods) and contrast the abnormal returns across the partitions.
The results, shown in Table 4, are directionally consistent for the full sample, insider trading,
and restatements. The return magnitude for restatements is about twice as large in the earlier
period. This supports the premise that the market partially impounds the valuation effects of
SEC financial reporting oversight at the time of earlier enforcement actions. The finding that
the more emphatic significant results are apparent in the restatement sample may reflect the
fact that this subsample has experienced the most dramatic increase in enforcement frequency
during the time period. These intertemporal comparisons, while directionally consistent with
our expectations, must be interpreted cautiously because of time-specific factors that may
affect the magnitude of market capitalization rates (e.g. interest rates, inflation rates, shifts in
inherent risk premia, etc.). For this reason, we suggest that the inter-temporal contrasts
reported in Table 4 may best be regarded as descriptive in nature. The comparisons indicate
the abnormal return magnitudes have declined from the earlier to the later period, consistent
with the market‟s anticipatory response to the later enforcement actions.
24
7. Conclusion
This paper assesses the valuation impact of SEC enforcement action on the share
prices of non-target cross-listed firms. We evaluate the premise that “legal bonding” of cross-
listed firms to the SEC‟s presumably more stringent regulations reduces investment risks and
capital costs, and consequently enhances market values of the equity shares of such firms.
Prior studies have concluded that the SEC has historically followed a “hands off” policy
toward cross-listed firms, thereby reducing or eliminating the potential valuation benefits of
legal bonding. However, more recent (post-2001) years witness a surge of SEC enforcement
actions against cross-listed firms. This more recent regime of active and aggressive SEC
enforcement enhances the credibility of the legal bonding premise, and also provides an
archive of data useful for evaluating the valuation impacts of the SEC enforcements on the
share prices of non-target cross-listed firms.
Our results indicate that in pursuing non-U.S. firms, the SEC actions confer significant
positive abnormal returns to cross-listed firms. Moreover, we show that the magnitudes of
such returns are associated with country-specific characteristics that measure the strength of
various aspects of a nation‟s financial system. Firms cross-listed from weak home legal
environments reap the greatest returns to the SEC action announcements. Ultimately, we
document that legal bonding is at least in part a driver of the cost of capital reduction for firms
who can stand up to increased scrutiny. Although prior research has had difficulty in
discriminating between bonding and avoiding explanations, results from this study cannot be
explained by market segmentation reductions, or other changes taking place at the time of the
secondary listing.
25
In addition to the bonding question, this study is relevant to concurrent debates in the
accounting policies literature. Our results are consistent with the intuition of Doidge et al.
2009, Leuz (2007), and Coffee (2007) who suggest that the Sarbanes-Oxley Act is not the
culprit for a slowdown in cross-listings in the US. A complementary explanation suggests
that as the legal landscape became more formidable for existing cross-listed firms, firms with
marginal reporting and governance quality who were considering a cross listing were
intimidated, leaving other countries‟ exchanges to cater to such lower quality firms intending
to cross-list (Piotroski and Srinivasan, 2007).26
This paper supports the sentiment of Ball and Shivakumar (2005), Burgstahler, et al.
(2006), Hail and Leuz (2006) and Holthausen (2009), Hail, et al. (2010) who stress that higher
quality reporting standards, such as IFRS, cannot independently supplant the institutional,
economic, legal, and regulatory factors that jointly contribute to reporting quality. The role
played by the enforcement of existing rules may actuate a key component of the regulatory
system.
More broadly, this research represents an important step in testing whether regulatory
enforcement provides benefits to markets and to whom such actions bestow the greatest gains.
Few studies have shown positive effects to specific regulatory actions that cannot be
explained by competitive effects.
Although the findings in this study document a positive impact of SEC enforcement
actions on the share values of non-target foreign firms, the implications for the wealth impact
of legal bonding in general should be drawn cautiously. The legal system to which foreign
26
In fact, of the 59 sample firms examined by Doidge et al. (2009) who delisted, more than 20% (12 firms) were
former targets of SEC enforcement (9) or class action lawsuits (3).
26
firms may adhere embraces a variety of regulatory protections with potential for positive and
negative impacts on security valuations.
For example, Licht et al. (2011), a study performed concurrently with our study,
examines capital market reactions to a U.S. Supreme Court decision that changed the civil
liability regime for U.S.-listed foreign issuers. This change, which denied the protection of
U.S. civil liability to investors in foreign located transactions, exhibits a positive association
with abnormal returns, suggesting that the reduction in potential liability actually benefitted
the value of U.S.-listed foreign firms, consistent with the interpretation that the previous civil
liability regime may have been too onerous.
The findings in Licht et al. (2011) that a reduction in potential civil liability has a
positive impact on share values does not necessarily conflict with our findings that increased
SEC enforcement activity is also associated with increased share values. Adhering to a legal
system with multiple aspects undoubtedly includes some legal components that presently are
overly burdensome, and other components that enable reduced capital costs and higher share
values. The empirical results in this paper provide emphatic support for the interpretation that
SEC enforcement actions have created shareholder value for non-target cross-listed firms in
the contemporary (post-2001) era.
27
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Appendix A: Portfolio Details
Enforcement Actions
The number of events is reduced from the sample of 122 enforcements to 94 (30 insider trading, 50
restatement, and 14 miscellaneous activities) because there are overlapping event periods and
potentially confounding events. We remove 7 insider trading, 15 restatement, and 3 miscellaneous
events due to multiple observations occurring on, or within 5 days of the same date. We also search
for information in the media (The Wall Street Journal and Google) to prevent the inclusion of events
that simultaneously occur with confounding market developments. Three observations (whose
portfolio abnormal returns average -.0004) are excluded. Untabulated results including these
observations are equivalent. Results are likewise unchanged when firms with earnings announcements
that take place within 5 days of the event date are included. In section 5.3, we use dummy variables to
capture the effect of adjacent enforcements that were discarded.
Portfolio Construction
We use the universe of foreign and cross-listed firms covered by CRSP to form equally-weighted
portfolios at each SEC action date as follows. We identify cross-listed firms via Compustat and CRSP
ADR and ADS company name headings, depositary bank websites (JP Morgan, Citigroup, and the
Bank of New York‟s ADR.com), and the SEC website. We identify foreign firms using the location of
their incorporation in Compustat. We require that firms have data for each of the 10 days of the event
period window (-1,+8). We remove any firms who have daily returns (event period CARs) greater
than 10% (40%) in absolute magnitude as these represent extreme performance that is likely driven by
other firm-specific factors. The average number of firms per event with the necessary information to
calculate abnormal returns is about 800 (the range is from 699 to 888). On average, 51.2% of the
portfolio is comprised of cross-listed firms.
Alternative Returns Specifications Alternative windows are tested ((0, 4), (-2, +2), and (-1, 5)) yield results that are statistically
significant with the same sign and comparable (daily return) magnitudes as the ones reported. Results
using raw, market-model adjusted, size-adjusted, and Fama-French three-factor event period models
yield estimates that are directionally consistent with the market model results and each is significant at
the .01 level. Market-model adjusted returns have been prepared for all analyses and are available
from the author upon request.
34
Appendix B: First Stage Regression The first stage regression uses the equation below. The type of violation dictates what variables are included (for
example PROFIT is only used for insider trading and REST_PCT_MKTVAL is only used for restatements).
Separate regressions are run for each type of violation and separated by listing status. Year and firm-level fixed
effects are included to mitigate potential dependencies in the residuals.
WHERE:
CARei= (-1, 8) Cumulative Abnormal Return27
LMKCAPi=natural log of the reacting firms‟ U.S. market capitalization at the beginning of the calendar
year
X_LIST_ENFORCEe = indicator equal to „1‟ when SEC action involves a cross-listed firm, „0‟
otherwise
DELAY_YRSe =the number of years that pass between the first illegal action and the announcement date
LMKCAP_ENFORCEe = natural log of the enforcement firm market capitalization at the beginning of
the calendar year (when multiple firms are involved, the largest firm is used)
IT_CONFOUNDe = indicator equal to „1‟ when another SEC non-U.S. insider trading action takes place
within ten calendar days of the enforcement action, „0‟ otherwise
MERGERe = indicator equal to „1‟ when SEC action involves a merger or acquisition, „0‟ otherwise
SETTLEDe =indicator variable equal to „1‟ when the case was settled at the time of the announcement
PROFITe =average illegal profits made by corporate insiders
REST_CONFOUNDe = indicator equal to „1‟ when another SEC non-U.S. restatement related
enforcement action takes place within ten calendar days of the enforcement action, „0‟ otherwise
ADVERSEe = indicator equal to „1‟ when restatement has a detrimental effect on net income, „0‟
otherwise
FRAUDe = indicator equal to „1‟ when SEC action charges accused firm with fraud, „0‟ otherwise
REST_PCT_MKTVALe =restatement scaled by market cap at the beginning of the calendar year
FINEe=the U.S. dollar amount of any fines imposed by the SEC
εei=the residual; this is also OCARei which becomes the starting point for the second stage analyses
Year Fixed Effects= dummies for each year
Firm Fixed Effects=dummies for each firm
27
Note: e and i subscripts denote event „e‟ and firm „i‟, respectively
35
Appendix C: Results of First Stage Regression This table provides the results of the first stage regression of the variables in Appendix B. We delete any observations
whose 10-day CAR is greater than three standard deviations from the portfolio mean, and control for residual
dependencies using year and firm level fixed effects. White‟s (1980) t-statistics using heteroskedasticity-consistent
standard errors are reported below coefficient estimates. All coefficients are multiplied by 100 for ease of exposition.
Insider Trading Restatement Miscellaneous
Foreign Cross Foreign Cross Foreign Cross
Intercept .013 -.073***
.031***
.056***
-3.564***
-8.216***
(0.51) (-3.18) (3.76) (7.55) (-5.24) (-11.22)
LMKCAP .000***
.000
.000***
.000***
.000**
.000***
(2.68) (1.38) (6.08) (2.78) (2.18) (2.93)
X_LIST_ENFORCE 3.377 -.085***
-.252 .428**
-2.981***
-1.632***
(1.25) (-3.41) (-1.17) (2.28) (-5.13) (-2.67)
DELAY_YRS -.080 .012***
.083***
.090***
-0.000 0.4318***
(-0.26) (4.25) (2.68) (3.24) (0.01) (5.85)
LMKCAP_ENFORCE -.437 .028***
-.375***
-.496***
0.9205***
1.136***
(-0.55) (3.82) (-3.32) (-4.96) (6.97) (7.84)
IT_CONFOUND .060 .044***
-1.080***
.070
(0.06) (4.85) (-2.6) (0.19)
MERGER .049 -.032
***
(0.07) (-4.73)
SETTLE -.007 -.022
***
(-0.01) (-3.52)
AVE_PROFIT -.000 -.000
***
(-0.98) -(4.52)
REST_CONFOUND
-.011
*** -.220
(-5.34) (-1.19)
ADVERSE
-.003 -.589
*
(-0.69) (-1.82)
FRAUD
-.008
*** .143
(-4.18) (0.84)
REST_AS_PCT_MKVAL
.020
*** 2.184
***
(3.93) (5.06)
FINE
-.000***
-.000***
(-6.25) (-5.33)
F-value 8.33***
10.72***
16.58***
23.04***
20.31***
31.01***
Adj-R2 1.73% 2.58% 1.66% 2.53% 2.12% 2.80%
N 9,969 8,521 18,631 16,844 4,672 5,383
Year & Firm Fixed
Effects? Yes Yes
Yes Yes
Yes Yes
36
Figure 1: Portfolio Returns by Event Type This figure shows the market adjusted returns to the non-target portfolio of firms around the announcement of
enforcement actions by the SEC against non-U.S. firms. The 94 data points are represented by different symbols
which denote enforcement type.
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1995 1998 2001 2004 2006
Mar
ket
Ad
just
ed
Re
turn
Time
Portfolio Returns by Event Type
Insider Trading
Restatements
Other
37
Figure 2: Daily Abnormal Return over Event Window This figure shows the market-adjusted daily returns to the portfolio of non-target non-U.S.
firms around the announcement of enforcement actions by the SEC again non-U.S. firms.
-0.20%
-0.10%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
-14 -10 -6 -2 2 6 10 14
Ab
no
rmal
Re
turn
s
Time
Daily AR over Event Window
38
Table 1: Sample Description Cross-listed (foreign) firms represent firms domiciled outside the U.S. with (without) a home market listing in
addition to the U.S. listing. Non-U.S. firms are defined as the union of cross-listed and foreign firms. The left
hand side of Panel A describes the SEC enforcement of insider trading, restatement, and miscellaneous
enforcement actions, respectively, for non-U.S. firms.a We split the data into two equal time periods (1995-2001
and 2002-2008). The right hand side of Panel A partitions the non-U.S. enforcements based upon the target firms‟
listing type. Panel B compares the representation of non-U.S. firms under SEC jurisdiction (left side) to the
representation of non-U.S. firms pursued by the SEC (right side). On the left side, the percentage of SEC
regulated markets that are foreign, cross-listed, and non-U.S. are provided. The data is available from each
exchange and is cross validated via the SEC‟s website (as of April 2010). OTC firms that are exempt from SEC
requirements are excluded. On the right side, the percentage of all SEC enforcements that relate to foreign, cross-
listed, and non-U.S. firms are provided. The data in Panel B is restricted to the 2002-2008 period, which drops 25
actions. The denominator (156 for insider trading and 575 for restatements) comes from Panel A. The 17 firms
from the miscellaneous category are excluded from this Panel B because the comparable domestic enforcement by
the SEC in this category is not clearly defined.
Panel A: SEC Enforcements
Time Partition
Listing Type Partition
1995-2001 2002-2008
Total
(1995-2008)
Exchange
Listings OTC Other
Insider trading Cross-Listed 15 14 29 28 1 0
Foreign 3 7 10 8 2 0
Non-US 18 21 39 36 3 0
Domestic 159 135 294
Total 177 156 333
Restatements Cross-Listed 4 30 34 32 2 0
Foreign 0 32 32 23 7 2
Non-US 4 62 66 55 9 2
Domestic 200 513 713
Total 204 575 779
Miscellaneous Cross-Listed 4 8 12 12 0 0
Foreign 1 4 5 0 3 2
Non-U.S. 5 12 17 12 3 2
Total Sample Cross-Listed 23 52 75 72 3 0
Foreign 4 43 47 31 12 4
Non-US 27 95 122 103 15 4
Panel B: Representation of Non-U.S. firms in SEC Regulated Markets
SEC REGULATED MARKETS SEC ENFORCEMENTS
Total Exchange
Listings
OTC
Listings Total
Exchange
Listings
OTC
Listings Other
Insider Trading
Cross-List 10.0% 5.6% 16.8% 8.97% 8.33% 0.64% 0.00%
Foreign 7.8% 5.2% 11.9% 4.49% 3.21% 1.28% 0.00%
Non-US 17.8% 10.7% 28.7% 13.46% 11.54% 1.92% 0.00%
Restatements
Cross-List 10.0% 5.6% 16.8% 5.04% 4.70% 0.35% 0.00%
39
Foreign 7.8% 5.2% 11.9% 5.57% 4.00% 1.22% 0.35%
Non-US 17.8% 10.7% 28.7% 10.61% 8.70% 1.57% 0.35% a The SEC has brought more insider trading cases against defendants over the sample period than reported above.
We confine the sample to cases in which the SEC charges a firm insider because we are interested in pursuit of
firms. Therefore, we exclude cases in which the insiders are unassociated with any company (for example, see
http://www.sec.gov/litigation/litreleases/lr19212.htm). Roughly 40% of all insider trading cases fall into this
category. We exclude 236 firms from the restatement sample because we cannot identify the firms, so it is not
clear whether they are or are not non-U.S. firms. We exclude market manipulation, broker-dealer, touting,
“ponzi” and other localized violations involving non-U.S. firms from all analyses because they are not
representative of exchange-listed non-U.S. firms (for an exclusion example, see
http://www.sec.gov/litigation/litreleases/2006/lr19949.htm).
40
Table 2: Market Returns around Announcement Dates This table provides the market-adjusted returns to portfolios of firms centered on announcement dates of SEC enforcement of non-U.S.
firms. Unless noted otherwise, portfolio membership includes all foreign and cross-listed firms with requisite stock price data to compute
abnormal returns. Standard errors and t-statistics treat each event as one observation (similar to Fama and MacBeth (1973)).
Panel A: Non U.S. Firm Returns
Market Adjusted Returns
1995-2001
2002-2008
All Years
Window N Return t
N Return t
N Return t
(-14, -2) 21 -1.09%***
-3.14
73 .08% 0.61
94 -.18% -1.26
(-1, 8) 21 0.03% 0.05
73 .89%***††† 4.66
94 .72%***
3.45
(9, 20) 21 -0.21% -0.49
73 .22% 1.15
94 .12% 0.69
Panel B: By Listing Type 10-day Market Adjusted Returns
Foreign (-1, 8) 21 0.34% 0.67
73 0.80%***
4.28
94 0.70%***
3.04
Cross-listed (-1, 8) 21 -0.16% -0.28
73 1.01%***††† 4.85
94 0.75%***
3.51
Panel C: By Type of Violation
10-day Market Adjusted Returns Insider Trading (-1, 8) 12 0.36% 0.67
18 0.41% 1.25
30 0.39% 1.37
Restatements (-1, 8) 5 1.04% 0.82
45 0.93%***
3.35
50 0.94%***
3.42
Miscellaneous (-1, 8) 4 -1.79% -1.67
10 1.60%* 1.81
14 0.63% 0.79
Panel D: By Legal Origin
10-day Market Adjusted Returns English Legal Origin (-1, 8) 21 0.16% 0.31
73 0.85%***
2.87
94 0.69%***
2.7
Other Legal Origin (-1, 8) 21 0.06% 0.13
73 0.93%***††† 4.37
94 0.74%***
3.65 *, **, ***
denotes significance at the 10%, 5%, and 1% level for a two-tailed test, respectively. †, ††, †††
denotes significantly different from within panel row at the 10%, 5%, and 1% level for a two-tailed test, respectively.
41
Table 3: Regression Analysis of OCAR This table reports results of separate regressions for foreign and cross-listed firms by type of SEC action. Each
variable show on the left below is used as the independent variable in a separate regression and is defined in LaPorta
et al. (2006, Table 1). The dependent variable is the residual from the first stage (market-adjusted OCAR over the
(-1, 8) window, see Appendix B and C). The hypothesized sign (in parentheses) relates to the cross-listed firms. All
coefficients are multiplied by 100, and standard errors appear in parentheses below.
INSIDER TRADING RESTATEMENTS MISCELLANEOUS
Foreign Cross-Listed Foreign Cross-Listed Foreign Cross-Listed
Panel A: Legal Structures
English Law
Indicator
0.386 (-) -0.225 0.288* (-) -0.547*** -0.512 ? -0.154
(1.45)
(-1.13) (1.75)
(-4.24) (-1.5)
(-0.58)
Class Action
Indicator
-0.057 (-) -0.398** 0.557 (-) -0.217*** -0.450 ? -0.074
(-0.09)
(-2.12) (1.47)
(-1.83) (-0.36)
(-0.30)
Panel B: Country Indices* Disclosure
Requirements 0.966 ? -1.307** 0.59 (-) -2.085*** -1.175 ? -0.773
(1.1)
(-2.13) (1.08)
(-5.54) (-1.05)
(-0.96)
Liability 1.179* ? -0.025 0.684 (-) -0.307 -0.996 ? 0.557
(1.8)
(-0.07) (1.71)
(-1.32) (-1.19)
(1.13)
Rule Power 0.964** (-) 0.645*** 0.464* (-) -0.134 -0.843 ? -0.150
(2.23)
(3.07) (1.75)
(-1.02) (-1.53)
(-0.53)
Orders -0.468 ? -0.207 -0.173 (-) -0.418*** -0.052 ? -0.047
(-1.05)
(-1.02) (-0.62)
(-3.27) (-0.09)
(-0.17)
Private Enforcement 1.422 (-) -0.531 0.786 (-) -1.137*** -1.287 ? 0.720
(1.76)
(-0.99) (1.59)
(-3.35) (-1.24)
(1.01)
Public Enforcement -0.165 (-) -0.578 -0.01 (-) -0.408* -0.500 ? -0.074
(-0.2)
(-1.59) (-0.02)
(-1.79) (-0.48)
(-0.15)
Anti-Director Rights 0.1 ? -0.043 0.107 ? -0.114*** -0.152 ? 0.025
(0.9)
(-0.64) (1.54)
(-2.71) (-1.06)
(0.28)
Investigative Powers -0.624 (-) -0.473** -0.008 (-) -0.248* 0.054 ? -0.226
(-0.9)
(-1.92) (-0.02)
(-1.6) (0.06)
(-0.69)
Efficiency of
Judiciary -0.147 (-) -0.102* -0.358*** (-) -0.108*** 0.081 ? 0.125*
(-0.68)
(-1.88) (-2.76)
(-3.11) (0.29)
(1.73)
Investor Protection 0.073 (-) -0.033 0.055 (-) -0.08*** -0.083 ? 0.033
(1.32)
(-0.88) (1.6)
(-3.34) (-1.17)
(0.66)
Supervisor
Characteristics -0.831 (-) -0.861*** -0.357 ? 0.416** 0.637 ? -0.051
(-0.92)
(-3.05) (-0.66)
(2.36) (0.56)
(-0.14)
Panel C: Corruption Index
Corruption 0.235** ? -0.078* 0.078 ? -0.088*** -0.002 ? 0.001*
(2.36)
(-1.64) (1.28)
(-2.82) (-1.57)
(2.06)
Panel D: Country Fixed
Effects Regressions
R2 0.0041
0.0076 0.0029
0.0043 -0.001
0.016
F 2.06***
2.4*** 2.48***
2.58*** 0.870
2.59***
Significant Effects 3/40
2/47 0/37
33/48 0/38
1/48
N 9,968
8,618 18,631
17,094 5,384
4,728 *, **, ***
denotes significance at the 10%, 5%, and 1% level for a two-tailed test, respectively.
42
Table 4: Declining CAR Magnitude This table provides the results of Wilcoxon rank sum nonparametric tests
for the equivalence of the temporal first and second (equally numbered)
halves of portfolio returns by type of enforcement.
Early Late Difference p-value
Insider Trading 0.46% 0.28% 0.18% .35
Restatements 1.32% 0.65% 0.67% .07
Miscellaneous 0.86% 1.44% -0.58% .28
All 0.77% 0.66% 0.11% .38