Bias-Corrected Estimation of Price Impact in Securities Litigation

Taylor Dove, Davidson Heath and J B Heaton

American Law and Economics Review, 2019, vol. 21, issue 1, 184-208

Abstract: The single-firm event studies that securities litigants use to detect the impact of a corrective disclosure on a firm’s stock price have low statistical power. As a result, observed price impacts are biased against defendants and systematically overestimate the effect on firm value. We use the empirical distribution of daily stock returns to analyze the bias and develop bias-corrected estimators of price impact in securities litigation. Because of low statistical power, the ex ante incentives against committing securities fraud are also too low. We analyze the adjustment for optimal deterrence and find that it is material, but is nowhere equal to the opposing truncation bias.

Date: 2019
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