Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act

Pritchard, Adam C.; Nelson, Karen K.; Johnson, Marilyn F.

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Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act

Journal of Law, Economics and Organization, Forthcoming

Michigan Legal Studies Research Paper No. 02-011

51 Pages Posted: 14 Feb 2006

See all articles by Adam C. Pritchard

Karen K. Nelson

Texas Christian University - Department of Accounting

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems

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Abstract

This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with our predictions, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and abnormal insider selling after the PSLRA. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements.

Keywords: securities litigation, litigation risk, accounting fraud, insider trading

JEL Classification: K22

Suggested Citation: Suggested Citation

Pritchard, Adam C. and Nelson, Karen K. and Johnson, Marilyn F., Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act. Journal of Law, Economics and Organization, Forthcoming, Michigan Legal Studies Research Paper No. 02-011, Available at SSRN: https://ssrn.com/abstract=883684