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

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