Is There A Bias Against Foreign Firms in U.S. Courts?

What is it about?

Using a comprehensive sample of 2,361 public U.S. corporate defendants and 715 public foreign corporate defendants in U.S. federal courts in the period 1995–2000, we find that the market reaction at the announcement of a U.S. federal lawsuit is less negative for U.S. corporate defendants than for foreign corporate defendants. We find that this market reaction is rational; U.S. firms are less likely to lose than are foreign firms when we control for year, industry, type of litigation, size, and profitability. This finding may still reflect a sample selection bias. We control for this bias, and the results remain unchanged. We thus cannot rule out that U.S. firms have a home court advantage in U.S. federal courts.

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Why is it important?

Corporate litigation is rampant, and in these times of globalization, cross-border corporate litigation is trending up. So it is important to know whether domestic courts favor domestic firms. We are the first paper to show that U.S. courts do favor U.S. firms. The paper was featured in the Financial Times on December 13, 2006.

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