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

  • Sanjai Bhagat
  • Roberta Romano
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    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

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    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2475.

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    Date of creation: 01 May 2001
    Date of revision: 01 Jan 2002
    Handle: RePEc:ysm:somwrk:amz2475
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