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

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169 citations0/0 files storedAmerican Law and Economics Review

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Law, Economics, and Judicial Systems Financial Markets and Investment Strategies Corporate Finance and Governance

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 article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. This article 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 for criminal ones. The article 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 article reviews the use of event studies in corporate law and regulation.

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References

1985Using daily stock returns 1991Efficient Capital Markets: II 1997Event Studies in Economics and Finance 1981The Role of Market Forces in Assuring Contractual Performance 1969The Adjustment of Stock Prices to New Information 1995The New Issues Puzzle 2003The Adjustment of Stock Prices to New Information 1997Detecting long-run abnormal stock returns: The empirical power and specification of test statistics

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2010Regulatory Sanctions and Reputational Damage in Financial Markets 2017How Much Do Corporate Defendants Really Lose? A New Verdict on the Reputation Loss Induced by Corporate Litigation 2011Valid Inference in Single-Firm, Single-Event Studies 2007Empirical Analysis of the Impact of 2003 Blackout on Security Values of U.S. Utilities and Electrical Equipment Manufacturing Firms 2020Shareholder litigation rights and corporate acquisitions 2008The Market Reaction to Legal Shocks and Their Antidotes: Lessons from the Sovereign Debt Market

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