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Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7

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  • Zitzewitz Eric W

    (Dartmouth College)

Abstract

This paper examines the negotiated settlements of 20 market timing and late trading cases, comparing the restitution obtained for shareholders with an estimate of shareholder dilution. This restitution ratio varies from 0.04 to 5, or from 0.1 to 10 if penalties are included. While some of this variation is explained by differences in the defendants' conduct, controlling for this, settlement negotiations that involved New York as well as the Security and Exchange Commission (SEC) resulted in restitution ratios that were higher by a factor of 5-10. An analysis that uses the firms' headquarters location and customers' state of residence as instruments for New York's involvement suggests that this difference is causal, and not the result of New York involving itself in cases likely to lead to large settlements. Given the much larger staff and institutional expertise of the SEC, it is likely that these differences in outcomes are due to differences in effective aggressiveness, not prosecutorial resources. Differences in aggressiveness are consistent with popular conceptions of the regulators' career concerns, as well as with theories of industry focus and regulatory capture.

Suggested Citation

  • Zitzewitz Eric W, 2009. "Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-42, June.
    • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:24
    DOI: 10.2202/1935-1682.2185
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    References listed on IDEAS

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    3. Miguel Antón & Florian Ederer & Mireia Giné & Martin Schmalz, 2023. "Common Ownership, Competition, and Top Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 131(5), pages 1294-1355.
    4. Bajo, Emanuele & Croci, Ettore & Marinelli, Nicoletta, 2020. "Institutional investor networks and firm value," Journal of Business Research, Elsevier, vol. 112(C), pages 65-80.
    5. Massa, Massimo & Reuter, Jonathan & Zitzewitz, Eric, 2010. "When should firms share credit with employees? Evidence from anonymously managed mutual funds," Journal of Financial Economics, Elsevier, vol. 95(3), pages 400-424, March.

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