Misdeeds Matter: Long-Term Stock Price Performance after the Filing of Class-Action Lawsuits

Rob Bauer and Robin Braun

Financial Analysts Journal, 2010, vol. 66, issue 6, 74-92

Abstract: Consistent with theory, this study of shareholder litigation found a broad transformation in company characteristics and risk exposures and generally negative short- and long-term performance effects that differed substantially between two types of allegations. The findings have important implications for both regulator and institutional investor monitoring and decision-making strategies.Does shareholder litigation pay off for investors over the long term? How much does the type of allegation matter? We studied whether a disciplining effect occurs for sued companies and their managers and examined two different groups of allegations. Allegations of violations of the duty of loyalty affect individuals only, but the duty of care pertains to the corporate entity. In general, we observed a post-litigation transformation in company characteristics and risk exposures, which is consistent with theory. Although generally negative, short- and long-term performance effects differ substantially between types of allegations. We observed performance reversals only in companies with individual directors accused of insider trading. Effects are similar for companies with triggering events that precede the filing of a lawsuit. Our results have important implications for the decision-making and monitoring strategies of both regulators and institutional investors: whether to use litigation to exert control over managers.

Date: 2010
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DOI: 10.2469/faj.v66.n6.6

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