An Unexpected Test of the Bonding Hypothesis

We show that the U.S. Supreme Court’s ruling in the case of Morrison v. National Australia Bank in June of 2010 was associated with a statistically significant 37 basis point increase on the day in the price deviation between the U.S. cross-listed shares trading in U.S. markets and the underlying home-market shares. The Court unexpectedly ruled that the main fraud-related provisions of U.S. securities laws can apply only to transactions in foreign securities that take place in the U.S. Across our sample of almost 1,000 foreign firms from 42 different countries cross-listed on the major U.S. exchanges as well as those trading on over-the-counter (OTC) markets, the price deviations between the cross-listed and underlying home-market shares widened more dramatically for those companies with a lower presence in the U.S. as measured by the fraction of global trading that takes place in U.S. markets. The market’s revaluation of the cross-listed shares around the decision is consistent with the idea that investors care about the extent to which U.S. securities laws apply, an important driver of the bonding role that U.S. markets play.