Shareholder Litigation: Deterrent Value, Merit and Litigants' Options

Abstract

The paper contributes to the theoretical and empirical literature on shareholder litigation in four ways: (1) We review the literature on the deterrent effects of class actions, noting contradictions, and verify that the current system cannot result in optimal deterrence; (2) We demonstrate that the empirical research on the merits suffers from a lack of statistical rigor; (3) We develop a model that shows how low-value settlements may represent the efficient resolution of meritorious claims, rather than "nuisance suit" settlements. We further explain plaintiffs' attorneys' behavior in arriving at settlements by viewing the shareholder class action as an option; and (4) We test hypotheses and update portions of the empirical research using sophisticated statistical techniques.

JEL Classification: G38, K22