IDEAS home Printed from https://ideas.repec.org/p/ysm/wpaper/amz2475.html
   My bibliography  Save this paper

Event Studies and the Law - Part I: Technique and Corporate Litigation

Author

Listed:
  • Sanjai Bhagat
  • Roberta Romano

Abstract

Event 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

Suggested Citation

  • Sanjai Bhagat & Roberta Romano, 2001. "Event Studies and the Law - Part I: Technique and Corporate Litigation," Yale School of Management Working Papers amz2475, Yale School of Management, revised 01 Jan 2002.
    • Handle: RePEc:ysm:wpaper:amz2475
    as

    Download full text from publisher

    File URL: https://repec.som.yale.edu/icfpub/publications/2475.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. David M. Cutler & Lawrence H. Summers, 1988. "The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 157-172, Summer.
    2. 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 436-461, June.
    3. Acharya, Sankarshan, 1988. " A Generalized Econometric Model and Tests of a Signalling Hypothesis with Two Discrete Signals," Journal of Finance, American Finance Association, vol. 43(2), pages 413-429, June.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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 501-537, October.
    9. 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.
    10. Mitchell, Mark L, 1989. "The Impact of External Parties on Brand-Name Capital: The 1982 Tylenol Poisonings and Subsequent Cases," Economic Inquiry, Western Economic Association International, vol. 27(4), pages 601-618, October.
    11. Prabhala, N R, 1997. "Conditional Methods in Event Studies and an Equilibrium Justification for Standard Event-Study Procedures," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 1-38.
    12. 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.
    13. 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.
    14. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    15. 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.
    16. Sanjai Bhagat & John Bizjak & Jeffrey L. Coles, 1998. "The Shareholder Wealth Implications of Corporate Lawsuits," Financial Management, Financial Management Association, vol. 27(4), Winter.
    17. 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.
    18. 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.
    19. 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 377-399, June.
    20. 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, February.
    21. 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.
    22. 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 512-536, June.
    23. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    24. Sefcik, Se & Thompson, R, 1986. "An Approach To Statistical-Inference In Cross-Sectional Models With Security Abnormal Returns As Dependent Variable," Journal of Accounting Research, Wiley Blackwell, vol. 24(2), pages 316-334.
    25. Roberta Romano & Sanjai Bhagat, 2001. "Event Studies and the Law: Part II - Empirical Studies of Corporate Law," Yale School of Management Working Papers ysm183, Yale School of Management.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cassella, Stefano & Rizzo, A. Emanuele, 2023. "The equity value implications of court ideology: Evidence from federal judge turnover," Journal of Corporate Finance, Elsevier, vol. 79(C).
    2. Laure de Batz & Evžen Kočenda & Evžen Kocenda, 2023. "Financial Crime and Punishment: A Meta-Analysis," CESifo Working Paper Series 10528, CESifo.
    3. Salma Damak & Hend Guermazi & Adel Beldi, 2022. "The Stock Market Reaction to Securities Class Action Filings," International Journal of Economics and Financial Issues, Econjournals, vol. 12(6), pages 127-132, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sanjai Bhagat & Roberta Romano, 2001. "Event Studies and the Law - Part I: Technique and Corporate Litigation," Yale School of Management Working Papers amz2475, Yale School of Management, revised 01 Jan 2002.
    2. Sanjai Bhagat & Roberta Romano, "undated". "Event Studies and the Law--Part I: Technique and Corporate Litigation," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1021, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
    3. Sadok El Ghoul & Omrane Guedhami & Sattar A. Mansi & Oumar Sy, 2023. "Event studies in international finance research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(2), pages 344-364, March.
    4. Maher Kooli & Jean-Marc Suret, 2001. "The Aftermarket Performance of Initial Public Offerings in Canada," CIRANO Working Papers 2001s-52, CIRANO.
    5. Anna Abdulmanova & Stephen P. Ferris & Narayanan Jayaraman & Pratik Kothari, 2021. "The effect of investor attention on fraud discovery and value loss in securities class action litigation," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(3), pages 513-552, September.
    6. Krishnamurthy, Srinivasan & Spindt, Paul & Subramaniam, Venkat & Woidtke, Tracie, 2005. "Does investor identity matter in equity issues? Evidence from private placements," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 210-238, April.
    7. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    8. Wu, Congsheng & Kwok, Chuck C.Y., 2007. "Long-run performance of global versus domestic initial public offerings," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 609-627, March.
    9. Ana Paula Serra, 2002. "Event Study Tests: A brief survey," FEP Working Papers 117, Universidade do Porto, Faculdade de Economia do Porto.
    10. Benzoni, Luca & Schenone, Carola, 2010. "Conflict of interest and certification in the U.S. IPO market," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 235-254, April.
    11. Shahram Amini & Vijay Singal, 2020. "Are earnings predictable?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(3), pages 528-562, July.
    12. Ehrhardt, Olaf & Koerstein, Ralf, 1999. "Die Simulation langfristiger Überrenditen," SFB 373 Discussion Papers 1999,56, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    13. José Emilio Farinós, 2001. "Rendimientos anormales de las OPV en España," Investigaciones Economicas, Fundación SEPI, vol. 25(2), pages 417-437, May.
    14. Mohamed Albaity & Diana Syafiza Said, 2016. "Impact of Open-Market Share Repurchases on Long-Term Stock Returns," SAGE Open, , vol. 6(4), pages 21582440166, October.
    15. Liu, Xia (Summer) & Megginson, William L. & Xia, Junjie, 2022. "Industrial policy and asset prices: Evidence from the Made in China 2025 policy," Journal of Banking & Finance, Elsevier, vol. 142(C).
    16. Shawawreh Fawaz Khalid Al, 2023. "Reassessing The Long-Run Abnormal Performance Of Jordanian Ipos: An Event Study Approach," Foundations of Management, Sciendo, vol. 15(1), pages 141-160, January.
    17. Chan, Konan & Ikenberry, David L. & Lee, Inmoo, 2007. "Do managers time the market? Evidence from open-market share repurchases," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2673-2694, September.
    18. Ferguson, Colin & Finn, Frank & Hall, Jason & Pinnuck, Matt, 2010. "Speculation and e-commerce: The long and the short of IT," International Journal of Accounting Information Systems, Elsevier, vol. 11(2), pages 79-104.
    19. Walker, Thomas John & Walker, Marcus Glenn & Thiengtham, Dolruedee Nuttanontra & Pukthuanthong, Kuntara, 2014. "The role of aviation laws and legal liability in aviation disasters: A financial market perspective," International Review of Law and Economics, Elsevier, vol. 37(C), pages 51-65.
    20. Lizińska Joanna & Czapiewski Leszek, 2019. "Long-Term Equity Performance in Poland – Searching for Answers with the Calendar-Time Portfolio Approach," Folia Oeconomica Stetinensia, Sciendo, vol. 19(1), pages 43-55, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ysm:wpaper:amz2475. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/smyalus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.