An Unexpected Test of the Bonding Hypothesis

In its June 2010 Morrison v. National Australia Bank ruling, the U.S. Supreme Court unexpectedly decided that key fraud-related provisions of U.S. securities laws would only apply to transactions in foreign securities that take place on U.S. exchanges. We document a statistically significant and economically large increase in the price of U.S. cross-listed foreign stocks relative to their currency-adjusted equivalent home-market shares around the decision, which we associate with the newly differentiated legal status accorded U.S. cross-listed shares by Morrison. We interpret the market's reaction to the decision as affirming that investors, both foreign and domestic, value how U.S. securities laws apply, an important element of the “bonding” hypothesis as a motive for international cross-listings