Institutional Monitoring Through Shareholder Litigation
C.S. Agnes Cheng
Louisiana State University
Prairie View A&M University - College of Business
Gerald J. Lobo
University of Houston - C.T. Bauer College of Business
CUNY Baruch College
March 19, 2010
Journal of Financial Economics, Vol. 95, pp. 356-383, 2010
This paper investigates the effectiveness of using securities class action lawsuits in monitoring defendant firms by institutional lead plaintiffs from two aspects: (1) immediate litigation outcomes, including the probability of surviving the motion to dismiss and the settlement amount, and (2) subsequent governance improvement such as changes in board independence. Using a large sample of securities lawsuits from 1996 to 2005, we show that institutional investors are more likely to serve as the lead plaintiff for lawsuits with certain characteristics. After controlling for these determinants of having an institutional lead plaintiff, we document that securities class actions with institutional owners as lead plaintiffs are less likely to be dismissed and have larger monetary settlements than securities class actions with individual lead plaintiffs. This effect exists for various types of institutions including public pension funds. We also find that after the lawsuit filings, defendant firms with institutional lead plaintiffs experience greater improvement in their board independence than defendant firms with individual lead plaintiffs. Our study suggests that securities litigation is an effective disciplining tool for institutional owners.
Number of Pages in PDF File: 66
Keywords: Corporate governance, Institutional Investors, Monitoring, Shareholder litigation
JEL Classification: G34, K41Accepted Paper Series
Date posted: September 15, 2006 ; Last revised: March 23, 2010
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