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


  • Sanjai Bhagat
  • Roberta Romano


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:somwrk:amz2475

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    Cited by:

    1. Daniel Martin Katz & Michael J Bommarito II & Tyler Soellinger & James Ming Chen, 2015. "Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making," Papers 1508.05751,, revised May 2017.
    2. repec:eee:corfin:v:46:y:2017:i:c:p:411-441 is not listed on IDEAS
    3. Bebchuk, Lucian Arye & Cohen, Alma, 2003. "Firms' Decisions Where to Incorporate," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 383-425, October.
    4. Gokhale, Jayendra & Brooks, Raymond M. & Tremblay, Victor J., 2014. "The effect on stockholder wealth of product recalls and government action: The case of Toyota's accelerator pedal recall," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 521-528.
    5. Dhammika Dharmapala & Vikramaditya Khanna, 2017. "Stock Market Reactions to India's 2016 Demonetization: Implications for Tax Evasion, Corruption, and Financial Constraints," CESifo Working Paper Series 6707, CESifo Group Munich.
    6. repec:spr:infosf:v:10:y:2008:i:1:d:10.1007_s10796-007-9036-5 is not listed on IDEAS
    7. Atanasov, Vladimir & Black, Bernard & Ciccotello, Conrad & Gyoshev, Stanley, 2010. "How does law affect finance? An examination of equity tunneling in Bulgaria," Journal of Financial Economics, Elsevier, vol. 96(1), pages 155-173, April.
    8. Armour, John & Mayer, Colin & Polo, Andrea, 2010. "Regulatory Sanctions and Reputational Damage in Financial Markets," CEPR Discussion Papers 8058, C.E.P.R. Discussion Papers.
    9. repec:eee:corfin:v:45:y:2017:i:c:p:318-332 is not listed on IDEAS
    10. repec:eee:ecanpo:v:54:y:2017:i:c:p:26-48 is not listed on IDEAS
    11. Stephan Wittig, 2012. "Luftfahrtindustrie: Implikationen der WTO-Berufungsentscheidungen für Airbus und Boeing," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 65(07), pages 21-27, April.
    12. Ormosi, Peter L., 2012. "Claim efficiencies or offer remedies? An analysis of litigation strategies in EC mergers," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 578-592.
    13. Cremers, K. J. Martijn & Litov, Lubomir P. & Sepe, Simone M., 2013. "Staggered Boards and Firm Value, Revisited," Working Papers 13-36, University of Pennsylvania, Wharton School, Weiss Center.
    14. Dhammika Dharmapala & Vikramaditya Khanna, 2016. "The Impact of Mandated Corporate Social Responsibility: Evidence from India's Companies Act of 2013," CESifo Working Paper Series 6200, CESifo Group Munich.

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