The Effects of Cross-Border Cooperation on Enforcement and Earnings Attributes

Abstract

The events of Sept. 11, 2001, prompted sweeping cross-border coordination efforts for securities regulators around the globe. After 9/11, the International Organization of Securities Commissions (IOSCO) forged an arrangement—the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMOU)—that standardizes the protocol for information sharing among participating securities regulators. I link this arrangement to the ability of the SEC to pursue U.S.-listed foreign firms by showing that the probability of enforcement increases by a factor of two or more in firms whose home countries enlist in the MMOU. A much more limited effect on enforcement is observed for similar but bilateral information-sharing agreements, indicating that a broader network creates powerful incentives that are difficult to replicate bilaterally. Because different countries enter the MMOU at different times, their enlistments create a set of staggered shocks to the SEC’s enforcement capacity for U.S.-listed foreign firms. These shocks are associated with predictable improvements in U.S. GAAP-reconciled earnings properties; this helps resolve questions about why the earnings quality of U.S.-listed foreign firms diverged from U.S. firms during pre-MMOU periods.