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The Screening Effect of the Private Securities Litigation Reform Act

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  • Stephen J. Choi
  • Karen K. Nelson
  • A. C. Pritchard

Abstract

Prior research shows that the Private Securities Litigation Reform Act (PSLRA) increased the significance of merit‐related factors in determining the incidence and outcomes of securities fraud class actions (Johnson et al. 2007). We examine two possible explanations for this finding: the PSLRA may have reduced the incidence of nonmeritorious litigation, or it may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre‐PSLRA. We find no evidence that pre‐PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. There is evidence, however, that pre‐PSLRA nonnuisance claims would be less likely to be filed under the PSLRA regime. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking hard evidence of securities fraud or abnormal insider trading. We find only limited evidence of a similar screening effect for case outcomes.

Suggested Citation

  • Stephen J. Choi & Karen K. Nelson & A. C. Pritchard, 2009. "The Screening Effect of the Private Securities Litigation Reform Act," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 6(1), pages 35-68, March.
    • Handle: RePEc:wly:empleg:v:6:y:2009:i:1:p:35-68
    DOI: 10.1111/j.1740-1461.2009.01137.x
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    References listed on IDEAS

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    1. Marilyn F. Johnson & Ron Kasznik & Karen K. Nelson, 2001. "The Impact of Securities Litigation Reform on the Disclosure of Forward‐Looking Information By High Technology Firms," Journal of Accounting Research, Wiley Blackwell, vol. 39(2), pages 297-327, September.
    2. AC Pritchard, 2007. "Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 627-652, October.
    3. D. Katherine Spiess & Paula A. Tkac, 1997. "The Private Securities Litigation Reform Act of 1995: the stock market casts its vote…," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(7-8), pages 545-561.
    4. Francis, J & Philbrick, D & Schipper, K, 1994. "Shareholder Litigation And Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 137-164.
    5. Stephen J. Choi, 2007. "Do the Merits Matter Less After the Private Securities Litigation Reform Act?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(3), pages 598-626, October.
    6. A. C. Pritchard & Hillary A. Sale, 2005. "What Counts as Fraud? An Empirical Study of Motions to Dismiss Under the Private Securities Litigation Reform Act," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 2(1), pages 125-149, March.
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    Cited by:

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    2. George P. Gao & Qingzhong Ma & David T. Ng & Ying Wu, 2022. "The Sound of Silence: What Do We Know When Insiders Do Not Trade?," Management Science, INFORMS, vol. 68(7), pages 4835-4857, July.
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    4. Huilin Zhang & Xiaoran Ni & Qi Jin, 2023. "Litigating crashes? Insights from security class actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2935-2963, September.
    5. Joshua Cutler & Angela K. Davis & Kyle Peterson, 2019. "Disclosure and the outcome of securities litigation," Review of Accounting Studies, Springer, vol. 24(1), pages 230-263, March.
    6. Chung, Chune Young & Kim, Incheol & Rabarison, Monika K. & To, Thomas Y. & Wu, Eliza, 2020. "Shareholder litigation rights and corporate acquisitions," Journal of Corporate Finance, Elsevier, vol. 62(C).
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    8. Xu, Wenming, 2016. "Reforming private securities litigation in China: The stock market has already cast its vote," International Review of Law and Economics, Elsevier, vol. 45(C), pages 23-32.
    9. Blakeley B. McShane & Oliver P. Watson & Tom Baker & Sean J. Griffith, 2012. "Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 9(3), pages 482-510, September.
    10. Agrawal, Anup & Nasser, Tareque, 2012. "Insider trading in takeover targets," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 598-625.
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    14. Dyck, Alexander & Morse, Adair & Zingales, Luigi, 2023. "How pervasive is corporate fraud?," Working Papers 327, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    15. Dain C. Donelson & Justin J. Hopkins & Christopher G. Yust, 2018. "The cost of disclosure regulation: evidence from D&O insurance and nonmeritorious securities litigation," Review of Accounting Studies, Springer, vol. 23(2), pages 528-588, June.
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