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

1 Pages Posted: 6 Apr 2022 Last revised: 28 Jul 2022

See all articles by Warren Bailey

Warren Bailey

Cornell University; Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance

Hui Ma

Tongji University - School of Economics and Management

Rongli Yuan

Renmin University of China

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: February 12, 2022

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.

Suggested Citation

Bailey, Warren B. and Ma, Hui and Yuan, Rongli and Zou, Hong, Does the Threat of Securities Class Actions Add Value for Shareholders? Evidence from China’s Adoption of Securities Class Actions (February 12, 2022). Available at SSRN: https://ssrn.com/abstract=4046227 or http://dx.doi.org/10.2139/ssrn.4046227

Warren B. Bailey (Contact Author)

Cornell University ( email )

S. C. Johnson Graduate School of Management
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United States
607-255-4627 (Phone)
607-254-4590 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/wbb1/

Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance ( email )

China

Hui Ma

Tongji University - School of Economics and Management ( email )

Siping Road 1500
Shanghai, Shanghai 200092
China

Rongli Yuan

Renmin University of China ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

China

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