The Information Content of Litigation Participation Securities: The Case of Calfed Bancorp

Harvard Business School Working Paper

44 Pages Posted: 8 Sep 2000

Date Written: August 4, 2000

Abstract

CalFed Bancorp is one of 126 S&Ls suing the U.S. government for breach of contract related to supervisory goodwill, a form of goodwill created by the acquisition of insolvent thrifts during the early 1980s. Before a determination of damages in its lawsuit, CalFed announced and issued a litigation participation security giving shareholders a proportional claim on recovered damages, if any. This announcement generated a positive excess return in part because it made CalFed a more likely acquisition target. This security also reveals important, yet previously unavailable, information about CalFed's lawsuit: its price reveals a market-based estimate of damages while its beta provides information about expected returns and the time until payoff. In a broader context, this security highlights acquisition facilitation as a benefit of issuing targeted stock as well as a series of lawsuits that will set important precedents regarding the determination of liability and the estimation of damages in breach of contract cases.

Keywords: Savings and loans, targeted stock, valuation, litigation, goodwill

JEL Classification: G21, G28, G32, K12, K22

Suggested Citation

Esty, Benjamin C., The Information Content of Litigation Participation Securities: The Case of Calfed Bancorp (August 4, 2000). Harvard Business School Working Paper, Available at SSRN: https://ssrn.com/abstract=238532 or http://dx.doi.org/10.2139/ssrn.238532

Benjamin C. Esty (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

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