Does the Threat of Securities Class Actions Add Value for Shareholders? Evidence from China’s Adoption of Securities Class Actions

Abstract

We examine China’s recent introduction of US-style securities class action lawsuits (SCA). Unlike US evidence, Chinese stock prices respond positively to the 2020 adoption of SCAs including a prerequisite that can discourage frivolous lawsuits. In contrast, cross-listed stocks already subject to US SCA do not exhibit a positive and significant response. Price reactions to pilot SCA rules reflect variation in barriers to frivolous lawsuits, in addition to China’s unique institutional environment. Positive 2020 price reactions are stronger for firms more exposed to SCA, particularly with poor disclosure or governance, state ownership, political connections, or less innovation. Firms react to SCA adoption by initiating D&O insurance, selecting more reputable auditors, and improving internal controls and financial reporting. Thus, the threat of SCA risk appears to benefit shareholders.