The Price of Pay to Play in Securities Class Actions
Journal of Empirical Legal Studies, vol. 8, no. 4, (2011): 650-81
35 Pages Posted: 27 Dec 2009 Last revised: 23 Jul 2013
Date Written: July 7, 2011
This paper studies the effect of campaign contributions to lead plaintiffs — “pay to play’’— on the level of attorneys’ fees in securities class actions. We find that state pension funds generally pay lower attorneys’ fees when they serve as lead plaintiffs in securities class actions than do individual investors serving in that capacity, and larger funds negotiate for lower fees. This differential disappears, however, when we control for campaign contributions made to officials with influence over state pension funds. This effect is most pronounced when we focus on state pension funds that receive the largest campaign contributions and that associate repeatedly as lead plaintiff with a single plaintiffs’ attorney firm. Thus, pay to play appears to increase agency costs borne by shareholders in securities class actions, undermining one of Congress’s principal goals in adopting the Private Securities Litigation Reform Act.
Keywords: securities class action, attorney fees, plaintiffs' attorneys, pension funds
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