Event Studies and the Law - Part I: Technique and Corporate Litigation
Posted: 18 Feb 2002
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. It reviews the event study methodology, its strengths and limitations for policy analysis, and how event studies have been used to evaluate the wealth effects of corporate litigation. The companion article reviews the use of event studies in corporate law and regulation. The event studies of corporate litigation indicate that defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. Those findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and the reputational losses are of equal magnitude for civil fines as criminal ones. The article concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, or/and narrowing the public announcement to as short a time-frame as possible.
JEL Classification: G140, G300, K410
Suggested Citation: Suggested Citation