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The Price of Pay to Play in Securities Class Actions

Author

Listed:
  • Stephen J. Choi
  • Drew T. Johnson‐Skinner
  • A. C. Pritchard

Abstract

We study the effect of campaign contributions to lead plaintiffs—“pay to play”—on the level of attorney fees in securities class actions. We find that state pension funds generally pay lower attorney fees when they serve as lead plaintiffs in securities class actions than do individual investors serving in that capacity, and larger funds negotiate for lower fees. This differential disappears, however, when we control for campaign contributions made to officials with influence over state pension funds. This effect is most pronounced when we focus on state pension funds that receive the largest campaign contributions and that associate repeatedly as lead plaintiff with a single plaintiff's attorney firm. Thus, pay to play appears to increase agency costs borne by shareholders in securities class actions, undermining one of Congress's principal goals in adopting the Private Securities Litigation Reform Act.

Suggested Citation

  • Stephen J. Choi & Drew T. Johnson‐Skinner & A. C. Pritchard, 2011. "The Price of Pay to Play in Securities Class Actions," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 8(4), pages 650-681, December.
    • Handle: RePEc:wly:empleg:v:8:y:2011:i:4:p:650-681
    DOI: 10.1111/j.1740-1461.2011.01236.x
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    References listed on IDEAS

    as
    1. Stephen J. Choi, 2011. "Motions for Lead Plaintiff in Securities Class Actions," The Journal of Legal Studies, University of Chicago Press, vol. 40(1), pages 205-244.
    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. Francis, J & Philbrick, D & Schipper, K, 1994. "Shareholder Litigation And Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 137-164.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
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