The effect of cross-border regulatory cooperation on investment efficiency

Abstract

The signing of the Multilateral Memorandum of Understanding (MMoU) has strengthened the US Securities and Exchange Commission's (SEC's) cross-border enforcement program over US-listed foreign firms through better cooperation with foreign securities regulators. Using the MMoU as a natural experiment, we examine the effect of enhanced SEC regulatory oversight on investment efficiency of US-listed foreign firms. We find that enhanced SEC regulatory oversight in the post-MMoU regime increases investment efficiency. This finding is robust to an array of sensitivity tests, including those that account for endogeneity. Cross-sectional analyses show that the effect is more pronounced for firms from countries with weaker institutions and higher levels of societal secrecy. Additional analyses reveal that the MMoU influences investment efficiency through market discipline and financing channels. These findings have important implications for regulators, policymakers, and corporate stakeholders. More importantly, by documenting the causal positive impact of the MMoU on investment efficiency, this study provides information to inform and refine the business case for securities regulators' global policy coordination efforts.