Stock Price Reactions to Securities Fraud Class Actions Under the Private Securities Litigation Reform Act

39 Pages Posted: 25 Oct 2001  

Adam C. Pritchard

University of Michigan Law School

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance

Date Written: October 2001

Abstract

We study the stock market's reaction to three events in the litigation process: (1) the revelation of potential fraud; (2) the filing a lawsuit; and (3) the judicial resolution of the lawsuit. We find a large and statistically significant negative reaction to the first event, and a smaller but still statistically significant reaction to the second. We find no significant reaction to the resolution of the motion to dismiss. We find little overlap between the variables that previous research has found to be correlate with the incidence of the litigation and the variables that correlate with the resolution of the motion to dismiss. We also find little overlap between the variable that correlate with the outcome of the motion to dismiss and the variables that explain the variance in stock market returns for these dates. We conclude that the outcome of litigation is not generally anticipated by stock market participants and that market returns are not influenced by the outcome of litigation.

Keywords: Securities fraud, litigation, corporate fraud

Suggested Citation

Pritchard, Adam C. and Ferris, Stephen P., Stock Price Reactions to Securities Fraud Class Actions Under the Private Securities Litigation Reform Act (October 2001). Michigan Law and Economics Research Paper No. 01-009. Available at SSRN: https://ssrn.com/abstract=288216 or http://dx.doi.org/10.2139/ssrn.288216

Adam C. Pritchard (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4048 (Phone)
734-647-7349 (Fax)

Stephen P. Ferris

University of Missouri at Columbia - Department of Finance ( email )

214 Middlebush Hall
Columbia, MO 65211
United States
573-882-6272 (Phone)
573-884-6296 (Fax)

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