Do Legal Bonding Benefits Really Exist? An Evaluation of the Bonding Theory

Abstract

My thesis reviews the legal bonding hypothesis and conducts an empirical analysis on the impact of the Morrison v. National Australia Bank case, which significantly narrows the scope of the application of U.S. securities law in cases involving foreign cubed factors (foreign investors of foreign issuer’s securities transacted on a foreign exchange). I first examine SEC enforcement statistics and find that the low level of SEC enforcement of securities laws against foreign issuers is hard to reconcile with the legal bonding hypothesis. I then conduct an event study around the Supreme Court oral argument of the Morrison case. The lack of a clear market reaction indicates that the Morrison decision is initially viewed as neither harmful nor beneficial to the foreign issuers. Furthermore, abnormal returns exhibit a significantly positive relationship with home country’s financial disclosure standard, but also a significantly negative relationship with home country’s private enforcement power. This mixed result does not clearly support or contrast the legal bonding theory. A less conservative interpretation suggests that the legal institutions and governance factors in a firm’s home market are not significantly related to the evaluation of its cross-­listed securities.