Power and Statistical Significance in Securities Fraud Litigation

64 Pages Posted: 17 Apr 2020 Last revised: 11 Jun 2021

See all articles by Jill E. Fisch

Jill E. Fisch

University of Pennsylvania Carey Law School; European Corporate Governance Institute (ECGI)

Jonah B. Gelbach

University of California, Berkeley - School of Law

Date Written: 2021


Event studies, a half-century-old approach to measuring the effect of events on stock prices, are now ubiquitous in securities fraud litigation. In determining whether the event study demonstrates a price effect, expert witnesses typically base their conclusion on whether the results are statistically significant at the 95% confidence level, a threshold that is drawn from the academic literature. As a positive matter, this represents a disconnect with legal standards of proof. As a normative matter, it may reduce enforcement of fraud claims because litigation event studies typically involve quite low statistical power even for large-scale frauds.

This paper, written for legal academics, judges, and policy makers, makes three contributions. First, it contributes to a nascent literature demonstrating that the standard event-study methodology can be problematic in securities litigation. In particular, the paper documents the tradeoff between power and confidence level and the ensuing impact on the likelihood that valid claims of fraud will erroneously be rejected. In so doing, the article highlights that the choice of confidence level is a policy judgment about the appropriate balance between the costs of litigation and the costs of securities fraud. Second, the article argues that the SEC has both the legal power and the institutional competence to develop litigation standards that balance these costs.

Third, the article provides a novel and feasible framework through which the SEC can implement such litigation standards. The framework relies on an assessment of the defendant firm’s market capitalization and abnormal returns distribution to determine the maximum confidence level (minimum significance level) that is consistent with the minimum required power of detecting a fraud of the benchmark magnitude. The SEC is uniquely positioned to make this determination based on the information it possesses about the level of fraud in the capital markets and the role of private litigation in deterring fraud.

Keywords: Civil procedure, evidence, financial economics, fraud on the market, event study methodology, statistics, fraudulent information, significance, class actions & certification, securities fraud, 10b-5 litigation, Securities and Exchange Commission, SEC

JEL Classification: C20, D53, G14, K22, K41

Suggested Citation

Fisch, Jill E. and Gelbach, Jonah B., Power and Statistical Significance in Securities Fraud Litigation (2021). Harvard Business Law Review, Vol. 11, p. 55, 2021, U of Penn, Inst for Law & Econ Research Paper No. 20-28, European Corporate Governance Institute - Law Working Paper No. 511/2020, Available at SSRN: https://ssrn.com/abstract=3575723 or http://dx.doi.org/10.2139/ssrn.3575723

Jill E. Fisch (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Jonah B. Gelbach

University of California, Berkeley - School of Law ( email )

215 Law Building
Berkeley, CA 94720-7200
United States

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