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Long-Term Performance of Distressed Firms: The Role of Class-Action Lawsuits

40 Pages Posted: 24 Mar 2010  

Rob Bauer

Maastricht University

Robin Braun

Maastricht University

Date Written: January 21, 2010

Abstract

Does shareholder litigation pay off for investors over long horizons and how much does the type of allegation matter‘ We study whether a disciplining effect occurs for distressed firms and their managers and examine two different groups of allegations. Allegations of violations of duty of loyalty effect individuals only, but duty of care pertains to the corporate entity. After litigation we observe a general transformation in firm characteristics and risk exposures, which is consistent with theory. Although generally negative, short- and long-term performance effects differ substantially between types of allegations. We observe performance reversals only in firms with individual directors accused of insider trading. Effects are similar for firms with triggering events that precede the initiation of a lawsuit. At the same time we fail to observe a simultaneous decrease in financial health in the form of their expected default frequency. Our results have important implications for regulator and institutional investor decision-making and monitoring strategies: whether to use litigation to exert control on managers, even in the presence of dual holdings of debt and equity.

Suggested Citation

Bauer, Rob and Braun, Robin, Long-Term Performance of Distressed Firms: The Role of Class-Action Lawsuits (January 21, 2010). Netspar Discussion Paper No. 01/2010-007. Available at SSRN: https://ssrn.com/abstract=1577189 or http://dx.doi.org/10.2139/ssrn.1577189

Rob Bauer (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

Robin Braun

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 (0) 43 388 3687 (Phone)
+31 (0) 43 388 4875 (Fax)

HOME PAGE: http://www.fdewb.unimaas.nl/finance/faculty/braun

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