Abstract

http://ssrn.com/abstract=268283
 
 

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Event Studies and the Law - Part I: Technique and Corporate
Litigation


Sanjai Bhagat


University of Colorado at Boulder - Department of Finance

Roberta Romano


Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

April 2001

Yale ICF Working Paper No. 00-31; Yale Law & Economics Research Paper No. 259

Abstract:     
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.

Number of Pages in PDF File: 35

JEL Classification: G140, G300, K410

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Date posted: May 1, 2001  

Suggested Citation

Bhagat, Sanjai and Romano, Roberta, Event Studies and the Law - Part I: Technique and Corporate Litigation (April 2001). Yale ICF Working Paper No. 00-31; Yale Law & Economics Research Paper No. 259. Available at SSRN: http://ssrn.com/abstract=268283 or http://dx.doi.org/10.2139/ssrn.268283

Contact Information

Sanjai Bhagat
University of Colorado at Boulder - Department of Finance ( email )
Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)
Roberta Romano (Contact Author)
Yale Law School ( email )
P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4965 (Phone)
203-432-4871 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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