The Causes and Consequences of Securities Class Action Litigation

49 Pages Posted: 24 Apr 2009 Last revised: 4 Jan 2011

Brian Carson McTier

University of Texas at San Antonio

John K. Wald

University of Texas at San Antonio

Date Written: April 23, 2009

Abstract

We examine the impact of securities class action lawsuits on firms’ investment and financing choices. Firms which overinvest are more likely to be sued. After a lawsuit, firms on average decrease overinvestment activity, and they decrease payouts while increasing leverage, cash holdings, and firm-specific risk. Additionally, we find some evidence that firms decrease diversification post-suit. Overall, these changes are consistent with a post-suit decrease in agency problems which lead to significant changes in real investment policies. The evidence is consistent with the notion that security class action lawsuits draw attention to agency problems which are then at least partly resolved.

Keywords: Securities Class Action Lawsuits, Governance, Agency Problems

JEL Classification: K22, G30

Suggested Citation

McTier, Brian Carson and Wald, John K., The Causes and Consequences of Securities Class Action Litigation (April 23, 2009). Available at SSRN: https://ssrn.com/abstract=1393857 or http://dx.doi.org/10.2139/ssrn.1393857

Brian Carson McTier

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

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