Shareholder Monitoring and Securities Class Action Lawsuits

Abstract

We identify a group of large shareholders with a track-record of owning firms that suffered securities class action lawsuits. These investors subsequently struggle to effectively monitor corporate management. Companies with a large proportion of these shareholders are at greater risk of future litigation, suffer poor acquisition returns, and have entrenched managers. Our analysis suggests that their failure to monitor effectively may arise from difficulties in managing operational risk. Overall, we contribute to the debate surrounding the merits of securities class action lawsuits by showing that shareholder monitoring is an important determinant of financial reporting misconduct.

Keywords: Securities class action litigation, shareholder monitoring, corporate governance

JEL Classification: D21, G32, G34, K22