Do the Merits Matter Less After the Private Securities Litigation Reform Act?

Abstract

The paper provides evidence on the impact of the Private Securities Litigation Reform Act of 1995 (PSLRA) by examining a sample of initial public offerings from 1990 to 1999 facing a mix of Section 11 and Rule 10b-5 antifraud claims. Others have provided evidence that the PSLRA increased the significance of merit-related factors in determining the incidence and outcomes of securities fraud class actions. The increase in the importance of merit-related factors, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of nuisance litigation. Second, the PSLRA may have reduced the incidence of both nuisance litigation as well as a subset of the pre-PSLRA meritorious claims where the additional costs imposed by the PSLRA made such claims unprofitable from the perspective of plaintiffs' attorneys. This paper tests between these hypotheses and provides evidence that meritorious claims lacking obvious "hard evidence" indicia of fraud (an accounting restatement or SEC action) (a) are less likely to be filed post-PSLRA and (b) face a greater likelihood of receiving a dismissal or low-value settlement in the post-PSLRA period. In determining the welfare implications of blocking frivolous suits, policymakers should therefore consider the negative impact of the PSLRA in also discouraging a significant fraction of meritorious litigation.

Empirical Analysis of Data Breach Litigation

“…The recognition of the legal merits or "case strength" of a lawsuit has been the topic of much analysis in legal scholarship (see, generally, Boyd & Hoffman forthcoming;Eisenberg & Lanvers 2009; and see, in regard to securities class action litigation, Johnson et al 2007;Cox et al 2008;McShane et al 2012;Choi 2007). The lack of clear evidence of identity theft following a data breach (GAO 2007a) is one reason for dismissal of data breach lawsuits.…”

The Value of Capital Market Regulation: IPOs versus Reverse Mergers

“…We use the two-stage procedure of Heckman (1979) to estimate the self-selection model (similar to that used in closely related contexts; see, e.g., Choi 2007;Choi et al 2009). In the first stage, consistent estimates are obtained from a probit regression of the dummy variable DIPO i, which equals 1 if company i lists after an IPO, and 0 otherwise, on Zi, a vector of explanatory variables.…”

The Screening Effect of the Private Securities Litigation Reform Act

“…The sample in Choi (2007) is limited to lawsuits arising out of initial public offerings. The primary liability exposure for IPO firms, however, is under the main Securities Act anti-fraud provision, Section 11.…”

“…As shown in 12 For example, litigation against finance companies declined significantly in the post-PSLRA period due to the end of the savings and loan crisis and an associated reduction in loan loss reserve litigation (Grundfest & Perino 1997). 13 To determine the population of 1,561 non-high technology sued firms during our sample period, we extrapolate the total number of 2000 IPO suits using the average from 1991-1999 based on Choi (2007). We then subtract the total number of IPO suits from 1991-2000 from the total overall number of suits to determine the population of sued firms.…”