Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms

Abstract

The ongoing Great Recession has triggered numerous proposals to improve the regulation of financial markets and, most importantly, the regulation of organizations such as credit rating agencies, underwriters, hedge funds, and banks, whose behavior is believed to have caused the credit crisis that spawned the economic collapse. Not surprisingly, some of the reform efforts seek to strengthen the use of private litigation . Private suits have long been championed as a necessary mechanism not only to ompensate investors for harms they suffer from financial frauds but also to enhance deterrence of wrongdoing. However, in recent years there has been a chorus calling for reform, singing a distinctly deregulatory tune and calling for serious restraints on private litigation as a vehicle for protecting investors. In this revisionist story, securities class action suits were cast as the villain that placed U.S. capital markets at a serious competitive disadvantage without producing any net benefits for institutional investors, whose trading makes them not only dominant participants in securities markets but also important beneficiaries of successful securities class action settlements.