Event Studies and the Law--Part I: Technique and Corporate Litigation
AbstractEvent studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy in its series Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series with number yale_lepp-1021.
Date of creation:
Date of revision:
Contact details of provider:
Web page: http://www.law.yale.edu/outside/html/home/index.htm
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bhagat, Sanjai & Jefferis, Richard H., 1991. "Voting power in the proxy process : The case of antitakeover charter amendments," Journal of Financial Economics, Elsevier, vol. 30(1), pages 193-225, November.
- Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
- Landes, William M & Posner, Richard A, 1987. "Trademark Law: An Economic Perspective," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 265-309, October.
- Dranove, David & Olsen, Chris, 1994. "The Economic Side Effects of Dangerous Drug Announcements," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 323-48, October.
- Bittlingmayer, George & Hazlett, Thomas W., 2000. "DOS Kapital: Has antitrust action against Microsoft created value in the computer industry?," Journal of Financial Economics, Elsevier, vol. 55(3), pages 329-359, March.
- Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995.
"Market underreaction to open market share repurchases,"
Journal of Financial Economics,
Elsevier, vol. 39(2-3), pages 181-208.
- David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994. "Market Underreaction to Open Market Share Repurchases," NBER Working Papers 4965, National Bureau of Economic Research, Inc.
- Karpoff, Jonathan M. & Malatesta, Paul H., 1989. "The wealth effects of second-generation state takeover legislation," Journal of Financial Economics, Elsevier, vol. 25(2), pages 291-322, December.
- Jarrell, Gregg & Peltzman, Sam, 1985.
"The Impact of Product Recalls on the Wealth of Sellers,"
Journal of Political Economy,
University of Chicago Press, vol. 93(3), pages 512-36, June.
- Gregg A. Jarrell & Sam Peltzman, 1984. "The Impact of Product Recalls on the Wealth of Sellers," University of Chicago - George G. Stigler Center for Study of Economy and State 33, Chicago - Center for Study of Economy and State.
- Kothari, S. P. & Warner, Jerold B., 1997. "Measuring long-horizon security price performance," Journal of Financial Economics, Elsevier, vol. 43(3), pages 301-339, March.
- Welch, Ivo, 2000.
"Views of Financial Economists on the Equity Premium and on Professional Controversies,"
The Journal of Business,
University of Chicago Press, vol. 73(4), pages 501-37, October.
- Ivo Welch, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," Yale School of Management Working Papers ysm122, Yale School of Management.
- Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
- Brav, Alon & Gompers, Paul A, 1997. " Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
- John J. Binder, 1985. "Measuring the Effects of Regulation with Stock Price Data," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 167-183, Summer.
- Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March.
- Lambert, Richard A. & Larcker, David F., 1985. "Golden parachutes, executive decision-making, and shareholder wealth," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 179-203, April.
- Bizjak, John M & Coles, Jeffrey L, 1995. "The Effect of Private Antitrust Litigation on the Stock-Market Valuation of the Firm," American Economic Review, American Economic Association, vol. 85(3), pages 436-61, June.
- David W. Prince & Paul H. Rubin, 2002. "The Effects of Product Liability Litigation on the Value of Firms," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 44-87, January.
- Engelmann, Kathleen & Cornell, Bradford, 1988. "Measuring the Cost of Corporate Litigation: Five Case Studies," The Journal of Legal Studies, University of Chicago Press, vol. 17(2), pages 377-99, June.
- John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, 02.
- Sanjai Bhagat & John Bizjak & Jeffrey L. Coles, 1998. "The Shareholder Wealth Implications of Corporate Lawsuits," Financial Management, Financial Management Association, vol. 27(4), Winter.
- Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
- A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
- Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
- Desai, Hemang & Jain, Prem C., 1999. "Firm performance and focus: long-run stock market performance following spinoffs," Journal of Financial Economics, Elsevier, vol. 54(1), pages 75-101, October.
- Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.