Security Class Actions: Leading Indicators and Covariates

Abstract

This report provides contingency tables (crosstab) analysis of security class actions (SCAs) and flags from Corporate Watchdog Reports. Watchdog Research assigns red and yellow flags to disclosures made by publicly traded firms according to their proprietary classification system. We find the following flags to be leading indicators of security class actions: red flags for financial revisions and CFO changes; and yellow flags for the Beneish M-Score, cybersecurity, and non-audit fees. We also find that a security class action in one year increases the probability of another security class action in the following year, i.e. security class actions are serially correlated over time. Additionally, we find that several flags are correlated with security class actions. The presence of a correlated flag increases the probability that a security class action will occur in the same calendar year it was awarded. The analysis is based on a panel data set of NYSE and NASDAQ companies from 2014 to 2018.

Keywords: Financial Economics, Accounting, Auditing, Red Flags, Security Class Actions

JEL Classification: G11, G12, M41, M42