Cross-Border Regulatory Enforcement and Firms’ Asymmetric Cost Behavior

Exploiting the staggered implementation of Multilateral Memorandum of Understanding (MMoU) that facilitates cross-border enforcement cooperation, we examine the causal effect of changes in cross-border regulatory enforcement capacity on firms’ asymmetric cost behavior. Consistent with the view that strengthening cross-border regulatory enforcement of securities laws enhances corporate governance and improves information transparency, we find that U.S.-listed foreign firms reduce the degree of cost stickiness after the MMoU signage. This effect is more pronounced for (1) firms characterized with poor information quality, (2) firms from countries with weaker institutions, and (3) firms from countries where the memorandum more effectively fosters cross-border cooperation. Overall, our study demonstrates the effectiveness of cross-border institutional efforts on shaping managers’ opportunistic behavior.