The causes and consequences of securities class action litigation

Brian C. McTier and John K. Wald

Journal of Corporate Finance, 2011, vol. 17, issue 3, 649-665

Abstract: We examine the impact of securities class action lawsuits on firms' investment and financing choices. Firms which overinvest are more likely to be sued. After a lawsuit, firms on average decrease overinvestment activity, and they decrease payouts while increasing leverage, cash holdings, and firm-specific risk. Additionally, we find some evidence that firms decrease diversification post-suit. Overall, these changes are consistent with a post-suit decrease in agency problems which lead to significant changes in real investment policies. The evidence is consistent with the notion that security class action lawsuits draw attention to agency problems which are then at least partly resolved.

Keywords: Securities; class; action; lawsuits; Agency; problems; Governance (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:17:y:2011:i:3:p:649-665

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