Fraud in the New-Issues Market: Empirical Evidence on Securities Class Actions

Bohn, James G.; Choi, Stephen J.

doi:10.2307/3312595

Cited by 50 publications

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“…Evidence from the pre-PSLRA period exists that companies offering smaller damage awards for 9 plaintiffs' attorneys rarely faced a securities class action (Bohn and Choi, 1996). Grundfest and Perino (1997) provide summary statistic evidence on the early post-PSLRA experience, covering only 1996.…”

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

Choi

2004

SSRN Journal

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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.

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

Choi

2004

SSRN Journal

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“…Plaintiffs' attorneys may focus on particular industry groupings due to the high fixed costs of learning about a particular industry. Bohn and Choi (1996) found that certain 2-digit SIC code groups experienced a disproportionate number of securities fraud class actions following an initial public offering. The three 2-digit SIC code groupings Bohn and Choi (1996) reported to contain the highest frequency of securities fraud class actions -SIC 35 (Industrial Machinery and Equipment), SIC 36 (Elecclude offerings where the offer amount is greater than or equal to 5 million dollars and less than 17.5 million dollars.…”

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“…U.S. issuers, for instance, may seek to sell abroad due to the cost of potential non-meritorious securities litigation associated with offerings in the United States. Alexander (1991) and Bohn and Choi (1996) provide evidence of frivolous securities litigation targeting issuers of initial public offerings.Even where suits are not frivolous, the cost of imposing liability may outweigh the benefits from deterring fraud. Arlen and Kraakman (1997), for example, contend that imposing strict liability on a firm for the actions of its managers may reduce the incentives of the firm to police for viola- 6 The periodic filings include annual Form 10-K, quarterly Form 10-Q, and occasional Form 8-K. See Section 13(a), Exchange Act; Regulation 13A (providing rules on periodic disclosure requirements of Exchange Act registered companies), Exchange Act; Forms 10-K, 10-Q, 8-K, Exchange Act.…”

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confidence: 99%

“…Similarly, 9.3% of the offshore offerings are from SIC code 36 compared with only 4.9% of the private placements (difference significant at the 5% level). The difference for offerings where the issuer is a member of SIC code 73, in contrast, is not statistically significant.Panel E of Table 3 also reports the fraction of offshore offering and private placement issuers that are members of the 3-digit SIC 357 group, reported in Bohn and Choi (1996) as the three-digit SIC group with the highest frequency of securities fraud class actions. 50 From Panel E note that 5.8% of the offshore offerings are from SIC 357 (Computer and Office Equipment) compared with 3.3% of the private placements (difference significant at the 5% level).…”

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Assessing the Cost of Regulatory Protections: Evidence on the Decision to Sell Securities Outside the United States

Choi

2001

SSRN Journal

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This paper examines the factors that affect the decision of U.S. companies to issue securities offshore compared with inside the United States. Utilizing a data set of 1,444 domestic private placements and offshore offerings from 1993 to 1997, the paper reports that firms that experienced a private securities fraud lawsuit in the past resort to foreign sources of capital more frequently. Similarly, companies in standard industrial classification groups that are targeted more often with private securities fraud litigation are also more likely to issue securities offshore than to conduct domestic private placements. Not all issuers, however, choose to exit the U.S. regime. The paper employs past experience with a SEC investigation as a proxy for the amount of risk that the issuer may pose to investors. Issuers with private securities fraud litigation experience that also encountered a past SEC investigation are more likely to raise capital through a domestic offering, consistent with the hypothesis that some issuers choose to raise capital in the United States when the bonding and signaling value of the U.S. legal liability regime outweighs the costs associated with antifraud liability.Stephen J. Choi † March 21, 2001 University of California, Berkeley † Visiting Professor, Yale Law School; Professor, Boalt Hall School of Law. E-mail comments to: schoi@law.berkeley.edu. Special thanks to Un Kyung Park. Helpful discussions with Anne Alstott, Ian Ayres, Bill Eskridge, Henry Hansmann, Tony Kronman, and Judith Resnik are gratefully acknowledged. Thanks for helpful comments to Jae-Sun Chung, Jill Fisch, Jesse Fried, Andrew Guzman, Marcel Kahan, Al Klevorick, Eihud Kamar, Eric Rasmusen, Hillary Sale, Roberta Romano, John Yoo, and the participants of the AALS Securities Regulation Section Meeting 2001, the Harvard Law and Economics Seminar, the Fordham Advanced Business Law Seminar, the Michigan Law and Economics Seminar, the NYU/Columbia Law and Business Seminar, the Yale Law School Faculty Workshop, and the UCLA/USC Corporate Law Roundtable 2000. 2The U.S. securities regulatory regime imposes a variety of information disclosure and antifraud mandatory requirements on issuers. Two competing views exist on the benefits of the mandatory regime. Under the first view, the mandatory application of the U.S. securities laws provides net positive benefits to investors (the "mandatory regulation hypothesis").1 Without mandatory regulation, opportunistic issuers may employ a lower level of regulatory protections in an effort to extract value from new investors in the company. Similarly, self-interested managers may seek to adopt a lower level of protections to facilitate the appropriation of value from shareholders. In contrast, under the second view, issuers may have sufficient incentives to adopt voluntarily regulatory protections that benefit investors (the "voluntary regulation hypothesis"), rendering mandatory regulation unnecessary.2 Rational investors will adjust the price they are willing to pay for the issuer'...

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Engineering Risk

Tapiero¹

2012

International Series in Operations Research &Amp; Management Science

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Fraud in the New-Issues Market: Empirical Evidence on Securities Class Actions

Cited by 50 publications

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

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

Assessing the Cost of Regulatory Protections: Evidence on the Decision to Sell Securities Outside the United States

Engineering Risk

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