Does cross-border regulatory cooperation reduce excessive risk-taking?

Abstract

This study investigates how heightened regulatory scrutiny by the U.S. Securities and Exchange Commission (SEC), caused by the passage of the Multilateral Memorandum of Understanding (MMoU), affects excessive risk-taking by U.S. listed foreign firms. Using data from 37 countries over the 2000–2020 period, we show that the adoption of the MMoU is associated with a significant decline in excessive risk-taking. This finding remains robust under a variety of sensitivity tests. Cross-sectional analysis shows that the drop in excessive risk-taking is more pronounced in firms with greater information opacity, and those from economies with pre-existing barriers to cross-border regulatory cooperation, and with weaker institutional environments. Finally, our findings indicate that the MMoU’s excessive risk-reducing effect is associated with enhanced firm value, implying that stronger international regulatory oversight facilitates efficient resource allocation. Overall, the results underscore the integral role of cross-border regulatory cooperation in constraining value-destroying managerial behavior to foster sustainable firm performance.