Legal Opportunism, Litigation Risk, and IPO Underpricing
28 Pages Posted: 29 Jul 2014
Date Written: July 28, 2014
We consider the importance of legal opportunism as an explanation for observed litigation following a large sample of initial public offerings (IPOs). We characterize legal opportunism as litigation based on the potential to recover losses after negative stock price developments rather than the legal merits. We find the most important predictors of post-IPO litigation activity (both likelihood and settlement amounts) to be ex post legal stakes (i.e., monetary damages plaintiffs could claim), and the remaining wealth available in the firm. Our results suggest a disturbing role for legal activity and starkly contrast existing models of IPO underpricing that focus on ex ante risk factors.
Keywords: Initial Public Offerings; Securities Regulation; Securities Litigation
JEL Classification: G18; G24; K22
Suggested Citation: Suggested Citation