Market Reaction to the Class Action Fairness Act of 2005

The Class Action Fairness Act of 2005 CAFA virtually removed the majority of class action jurisdiction from State to Federal Courts We examine the market reaction to various events leading to the passage of CAFA and find that stockholders of companies likely to be affected by CAFA react positively negatively to the events that increase decrease the chances of passage We examine the strength of this finding by testing three complementary hypotheses one companies susceptible to product liability litigation display greater sensitivity to CAFA than companies exposed to contract litigation two the market reaction would be more positive for companies with better corporate governance and transparency to events favoring the passage of CAFA three because a positive market reaction implies that stockholders favor Federal Courts over State Courts as a venue they would react negatively when a class action is remanded from a State to a Federal Court Our results support these hypotheses indicating that stockholders prefer Federal Courts to State Courts for class action jurisdiction