The Causes and Consequences of Securities Class Action Litigation
49 Pages Posted: 24 Apr 2009 Last revised: 4 Jan 2011
Date Written: April 23, 2009
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: Suggested Citation