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The causes and consequences of securities class action litigation

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  • McTier, Brian C.
  • Wald, John K.
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    Abstract

    We examine the impact of securities class action lawsuits on firms' investment and financing choices. Firms which overinvest are more likely to be sued. After a lawsuit, firms on average decrease overinvestment activity, and they decrease payouts while increasing leverage, cash holdings, and firm-specific risk. Additionally, we find some evidence that firms decrease diversification post-suit. Overall, these changes are consistent with a post-suit decrease in agency problems which lead to significant changes in real investment policies. The evidence is consistent with the notion that security class action lawsuits draw attention to agency problems which are then at least partly resolved.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 17 (2011)
    Issue (Month): 3 (June)
    Pages: 649-665

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    Handle: RePEc:eee:corfin:v:17:y:2011:i:3:p:649-665

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Securities class action lawsuits Agency problems Governance;

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    Cited by:
    1. M. Martin Boyer, 2012. "Insurer Information, Insiders and Initial Public Offering," CIRANO Working Papers 2012s-30, CIRANO.
    2. Boyer, M. Martin & Stern, Léa H., 2012. "Is corporate governance risk valued? Evidence from directors' and officers' insurance," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 349-372.

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