The Impact of Securities Class Actions on Firm Governance and Operating Performance
47 Pages Posted: 29 Aug 2014
Date Written: August 28, 2014
Prior research has found securities class actions result in management making improvements within the firm, which helps to reduce agency problems. However, little evidence exists as to whether these changes are beneficial to the firm. We examine the effect securities class actions have on management’s decisions and operating performance. Consistent with prior research we find that managers take corrective actions post filing. In a clear addition to the literature, we find that operating performance declined in the two years leading up to the filing of a securities class action and that there is no evidence that the filing adversely affects performance. Indeed, the findings suggest securities class actions may act as a turning point for the performance of a firm. Finally, we analyze the relationship between the corrective actions taken and abnormal operating performance in order to determine how effective securities class actions are at inducing improvements within the firm. We find that firms that increase leverage post filing, experience subsequent increases in their operating performance. These results suggest that securities class actions do not damage operating performance and instead result in performance enhancing improvements. Our study, therefore, adds support to the use of securities class actions as a disciplinary mechanism.
Keywords: Securities class actions, Agency problems, Governance, Operating performance
JEL Classification: G18, G30, K22
Suggested Citation: Suggested Citation