China and the Rise of Law-Proof Insiders

Alibaba, the e-commerce giant that completed a record-setting IPO in the United States in 2014 and was valued at over $700 billion in early 2021, is one of hundreds of Chi-na-based firms listed in the United States whose controlling insiders are largely law-proof: the corporate and securities laws governing these firms are unenforceable because the firms’ insiders, records, and assets are in China. This casts doubt on the claim that foreign firms list in the United States to bond insiders to tough securities law. In fact, for China-based firms, listing in the United States but not in China effectively insulates insiders from any securities law. Yet U.S. securities law not only allows these firms to list, but also requires them to dis-close less than domestic firms. U.S. securities law thus favors foreign entrepreneurs and likely harms U.S. investors. We suggest ways to reduce this bias and better protect U.S. investors. More generally, we argue that enforceability is key to corporate governance.