The causes and consequences of securities class action litigation |
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| Authors: | Brian C. McTier John K. Wald |
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| Affiliation: | 1. Arizona State University, United States;2. Louisiana Tech University, United States;3. Korea University, Republic of Korea;1. John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec H3G 1M8, Canada;2. College of Business and Economics, West Virginia University, 1601 University Ave., Morgantown, WV 26506-6025, United States;3. Trulaske College of Business, University of Missouri, 403B Cornell Hall, Columbia, MO 65211-2600, United States;4. School of Business and Economics, The University of Exeter, Exeter, Devon EX4 4PU, UK;1. School of Accounting and Finance, The University of Adelaide, Australia;2. School of Management, Tel Aviv University, Israel;1. University of South Florida, Department of Finance, 4202 East Fowler Ave., Tampa, FL 33620, United States;2. Mississippi State University, Department of Finance and Economics, 412 McCool Hall, Mississippi State, MS 39762, United States;3. Louisiana Tech University, Department of Finance, P.O. Box 10318, Ruston, LA 71272, United States |
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| 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. |
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