Inflation Methodologies in Securities Fraud Cases: Theory and Practice

Abstract

There are several basic methodologies for measuring the true value in a stock before a corrective disclosure of previously omitted or misstated information. Among the most common are the constant dollar inflation, constant percentage inflation, and constant true value methodologies. In this paper, we consider the theoretical justifications for each methodology given different types of allegations. We further examine the interaction of the choice of inflation methodology with the measurement of damages given the loss causation requirements of the securities laws. Finally, we examine settlements of shareholder class actions and document that an extremely large (and likely unreasonable) share of those settlements use the constant true value methodology.

Keywords: securities fraud, shareholder class action, inflation, damages

JEL Classification: K22, K00, K40, G00