Shareholder Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers

Abstract

This paper documents significantly negative stock price reactions to shareholder initiated class action lawsuits. We find that shareholders partially anticipate these lawsuits based on lawsuit filings against other firms in the same industry and capitalize part of these losses prior to a lawsuit filing date. We show that the more likely a firm is to be sued, the larger is the partial anticipation effect (shareholder losses capitalized prior to a lawsuit filing date) and smaller is the filing date effect (shareholder losses measured on the lawsuit filing date). Our evidence suggests that previous research that typically focuses on the filing date effect understates the magnitude of shareholder losses, and such an understatement is greater for firms with a higher likelihood of being sued.

Keywords: Class Action Lawsuits, Industry Spillovers, Litigation, Partial Anticipation, Propensity to be Sued, Shareholder Wealth Effects

JEL Classification: G14, G21, G22, G23, G24