Institutional monitoring through shareholder litigation

C.S. Agnes Cheng, Henry He Huang, Yinghua Li and Gerald Lobo

Journal of Financial Economics, 2010, vol. 95, issue 3, 356-383

Abstract: This paper investigates the effectiveness of using securities class action lawsuits in monitoring defendant firms by institutional lead plaintiffs from two aspects: (1) immediate litigation outcomes, including the probability of surviving the motion to dismiss and the settlement amount, and (2) subsequent governance improvement such as changes in board independence. Using a large sample of securities lawsuits from 1996 to 2005, we show that institutional investors are more likely to serve as the lead plaintiff for lawsuits with certain characteristics. After controlling for these determinants of having an institutional lead plaintiff, we show that securities class actions with institutional owners as lead plaintiffs are less likely to be dismissed and have larger monetary settlements than securities class actions with individual lead plaintiffs. This effect exists for various types of institutions including public pension funds. We also find that, after the lawsuit filings, defendant firms with institutional lead plaintiffs experience greater improvement in their board independence than defendant firms with individual lead plaintiffs. Our study suggests that securities litigation is an effective disciplining tool for institutional owners.

Keywords: Corporate; governance; Institutional; investors; Monitoring; Shareholder; litigation (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (94)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:95:y:2010:i:3:p:356-383

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