When Do Investors Know? Security Class Action Lawsuits, Short Selling, and Pre-filing News Releases

60 Pages Posted: 29 Jun 2021

See all articles by Chris T. Stivers

Chris T. Stivers

University of Louisville

Licheng Sun

Old Dominion University

Sounak Saha

Old Dominion University

Date Written: June 15, 2021

Abstract

Prior literature on security class-action lawsuits generally treats the lawsuit filing day as the day when the event become public, in terms of evaluating event-study returns and informed shorting activity. However, in the days prior to the lawsuit filing, our investigation reveals that there are public announcements of law-firm investigations into more than half of the sued firms. Over our 2009-2019 sample, accounting for these pre-filing investigation announcements weakens prior evidence that suggested short-selling investors tend to anticipate the lawsuit filing from private information or inference from related industry litigation. Strikingly, the average cumulative abnormal return over the 5-day pre-event filing window is about -6.5% for our full sample (similar to prior studies) but it is only about -2.2% when excluding the lawsuits with a recent pre-filing investigation announcement. Regarding responses to the public news releases, we find that: (1) the coincident abnormal short selling and negative abnormal returns are much larger for the higher quality lawsuits, and (2) the abnormal shorting coincident with the initial public news about the lawsuit is reliably negatively related to the post-news abnormal return. Thus, in addition to weakening an anticipatory shorting view, our evidence provides considerable support to conclusions in Engelberg, Reed, and Ringenberg (2012) - - that short sellers are skilled at analyzing publicly available information.

Keywords: Short selling, market efficiency

JEL Classification: G14, G12

Suggested Citation

Stivers, Chris T. and Sun, Licheng and Saha, Sounak, When Do Investors Know? Security Class Action Lawsuits, Short Selling, and Pre-filing News Releases (June 15, 2021). Available at SSRN: https://ssrn.com/abstract=3868949 or http://dx.doi.org/10.2139/ssrn.3868949

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

Licheng Sun

Old Dominion University ( email )

Strome College of Business
Department of Finance
Norfolk, VA 23529-0222
United States

Sounak Saha

Old Dominion University ( email )

Norfolk, VA 23529-0222
United States

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