Abstract

http://ssrn.com/abstract=1660162
 
 

References (62)



 


 



The Pricing Effects of Securities Class Action Lawsuits and Litigation Insurance


Judson Caskey


University of Texas at Austin - Red McCombs School of Business

November 5, 2012

Journal of Law, Economics, and Organization, Forthcoming

Abstract:     
The price reactions to corrective disclosures often serve as a benchmark for settlements in securities class action lawsuits. When the firm bears litigation costs, this benchmark creates a feedback effect that exacerbates the price reaction to news that contradicts managers' earlier reports. Litigation insurance provides value in this setting by reducing the need for investors to price the effects of anticipated litigation. Insurance also affects how changes in the litigation environment impact the firm, with some changes having opposite effects on the frequency of lawsuits against uninsured and insured firms. The pricing behavior of rational investors eliminates the valuation impact of the portion of settlements paid to investors, similar to dividends. The valuation impact of litigation arises from transaction costs, such as attorney fees, that the firm can mitigate by constraining misreporting and by purchasing insurance.

Keywords: Securities litigation, Litigation insurance, Earnings management, Rational expectations, Reporting bias

JEL Classification: G14, G30, K22, M41

Accepted Paper Series


Not Available For Download

Date posted: August 18, 2010 ; Last revised: January 24, 2013

Suggested Citation

Caskey, Judson, The Pricing Effects of Securities Class Action Lawsuits and Litigation Insurance (November 5, 2012). Journal of Law, Economics, and Organization, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1660162 or http://dx.doi.org/10.2139/ssrn.1660162

Contact Information

Judson Caskey (Contact Author)
University of Texas at Austin - Red McCombs School of Business ( email )
1 University Station, B6400
Austin, TX 78712
United States
(512)551-2796 (Phone)
Feedback to SSRN


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