A Cause for Alarm? The Long‐term Performance of Shareholder Class Action Defendants

Using two decades of shareholder class action filings, we provide evidence of significant and consistent long‐run price underperformance in defendant firms. By partitioning our sample according to the merits of an action, we show that firms less likely to have been involved in earnings manipulation, but who may have benefited from corrective management improvements and better signalling, go on to experience significant price reversals within a year of the filing date. Firms identified as high probability manipulators underperform over the long‐term. Our results have important implications for ongoing policy discussions on the merits of shareholder class actions.