Institutional Monitoring Through Shareholder Litigation

66 Pages Posted: 15 Sep 2006 Last revised: 23 Mar 2010

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Henry He Huang

Yeshiva University - Sy Syms School of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Yinghua Li

Arizona State University (ASU) - School of Accountancy

Date Written: March 19, 2010

Abstract

This paper investigates the effectiveness of using securities class action lawsuits in monitoring defendant firms by institutional lead plaintiffs from two aspects: (1) immediate litigation outcomes, including the probability of surviving the motion to dismiss and the settlement amount, and (2) subsequent governance improvement such as changes in board independence. Using a large sample of securities lawsuits from 1996 to 2005, we show that institutional investors are more likely to serve as the lead plaintiff for lawsuits with certain characteristics. After controlling for these determinants of having an institutional lead plaintiff, we document that securities class actions with institutional owners as lead plaintiffs are less likely to be dismissed and have larger monetary settlements than securities class actions with individual lead plaintiffs. This effect exists for various types of institutions including public pension funds. We also find that after the lawsuit filings, defendant firms with institutional lead plaintiffs experience greater improvement in their board independence than defendant firms with individual lead plaintiffs. Our study suggests that securities litigation is an effective disciplining tool for institutional owners.

Keywords: Corporate governance, Institutional Investors, Monitoring, Shareholder litigation

JEL Classification: G34, K41

Suggested Citation

Cheng, C.S. Agnes and Huang, Henry and Lobo, Gerald J. and Li, Yinghua, Institutional Monitoring Through Shareholder Litigation (March 19, 2010). Journal of Financial Economics, Vol. 95, pp. 356-383, 2010. Available at SSRN: https://ssrn.com/abstract=930532

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Henry Huang

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Yinghua Li (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States
480-965-5188 (Phone)

HOME PAGE: http://wpcarey.asu.edu/people/profile/2386522

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