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Do the Merits Matter More? Class Actions Under the Private Securities Litigation Reform Act


Marilyn F. Johnson


Michigan State University - Department of Accounting & Information Systems

Karen K. Nelson


Rice University - Jones Graduate School of Business

Adam C. Pritchard


University of Michigan Law School

September 2002

Michigan Law and Economics Research Paper No. 02-011; Stanford Law and Economics Olin Working Paper No. 249

Abstract:     
Congress passed the Private Securities Litigation Reform Act of 1995 in an attempt to discourage meritless securities fraud class actions. This paper uses damages, accounting, insider trading and governance variables to explain the incidence of securities fraud litigation both before and after the passage of the PSLRA. Using a matched sample of sued and non-sued firms from the computer hardware and software industries, we find that our accounting and insider trading variables, which do not correlate with the incidence of litigation prior to the passage of the PSLRA, are significant after the passage of the PSLRA. This finding is confirmed by our analysis of allegations and outcomes. Our accounting variables do not explain the incidence of pre-PSLRA accounting allegations, but they become significant after the passage of the PSLRA. Similarly, insider trading variables do not explain insider trading allegations before the PSLRA, but net sales by insiders correlate with such allegations after its enactment. Finally, we find no correlation between lawsuit outcomes and our accounting variables before the PSLRA, but accounting variables are significant after its enactment. Abnormal insider sales correlate with outcomes before the PSLRA, but not after. Overall, we interpret our findings as evidence that the PSLRA has furthered Congress's goal of discouraging frivolous securities fraud lawsuits.

Number of Pages in PDF File: 38

Keywords: Securities litigation, litigation risk, accounting fraud, insider trading

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Date posted: November 8, 2002  

Suggested Citation

Johnson, Marilyn F. and Nelson, Karen K. and Pritchard, Adam C., Do the Merits Matter More? Class Actions Under the Private Securities Litigation Reform Act (September 2002). Michigan Law and Economics Research Paper No. 02-011; Stanford Law and Economics Olin Working Paper No. 249. Available at SSRN: http://ssrn.com/abstract=349500 or http://dx.doi.org/10.2139/ssrn.349500

Contact Information

Marilyn F. Johnson
Michigan State University - Department of Accounting & Information Systems ( email )
270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-0152 (Phone)
517-432-1101 (Fax)
Karen K. Nelson
Rice University - Jones Graduate School of Business ( email )
337 McNair Hall
6100 South Main Street
Houston, TX 77005
United States
713-348-5388 (Phone)
713-348-6331 (Fax)
Adam C. Pritchard (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

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