Shareholder Wealth Effects of the Private Securities Litigation Reform Act of 1995

This paper investigates the reaction ofstock prices to enactment of the Private Securities LitigationReform Act of 1995 (PSLRA). Based on a sample of 489 high-technologyfirms, we find that the PSLRA was wealth-increasing, on average,and that the market reaction is more positive for firms at greatestrisk of being sued in a securities class action. However, wealso show that the PSLRA was less beneficial for firms likelyto be the subject of a meritorious lawsuit. Collectively, ourevidence implies that shareholders generally benefit from restrictionson private securities litigation, although these benefits aremitigated when other mechanisms for curbing fraudulent activityare inadequate.