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Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits

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  • Blakeley B. McShane
  • Oliver P. Watson
  • Tom Baker
  • Sean J. Griffith

Abstract

This article develops models that predict the incidence and amount of settlements for federal class action securities fraud litigation in the post‐PLSRA period. We build hierarchical Bayesian models using data that come principally from Riskmetrics and identify several important predictors of settlement incidence (e.g., the number of different types of securities associated with a case, the company return during the class period) and settlement amount (e.g., market capitalization, measures of newsworthiness). Our models also allow us to estimate how the circuit court a case is filed in as well as the industry of the plaintiff firm associate with settlement outcomes. Finally, they allow us to accurately assess the variance of individual case outcomes revealing substantial amounts of heterogeneity in variance across cases.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:empleg:v:9:y:2012:i:3:p:482-510
    DOI: 10.1111/j.1740-1461.2012.01260.x
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    References listed on IDEAS

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    1. Theodore Eisenberg & Geoffrey P. Miller, 2010. "Attorney Fees and Expenses in Class Action Settlements: 1993–2008," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 7(2), pages 248-281, June.
    2. Brian T. Fitzpatrick, 2010. "An Empirical Study of Class Action Settlements and Their Fee Awards," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 7(4), pages 811-846, December.
    3. 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.
    4. Tom Baker, "undated". "Insurance and the Law," University of Connecticut School of Law Working Papers uconn_ucwps-1004, University of Connecticut School of Law.
    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:

    1. Michael J Bommarito II & Daniel Martin Katz, 2016. "Measuring the temperature and diversity of the U.S. regulatory ecosystem," Papers 1612.09244, arXiv.org, revised Jan 2017.
    2. 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.
    3. Dain C. Donelson & Justin J. Hopkins, 2016. "Large Market Declines and Securities Litigation: Implications for Disclosing Adverse Earnings News," Management Science, INFORMS, vol. 62(11), pages 3183-3198, November.

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