Abstract

We use a unique sample of 1,478 securities class action lawsuits, filed against publicly traded US firms between 1996 and 2002, and a sample of 1,282 class action settlements, announced between 1993 and 2002, to examine the wealth effects of securities class action litigation on defendant firms and individual plaintiffs. To gain an insight into the costs and benefits of securities class actions, the first part of our study examines the cash flows between all parties involved in a lawsuit. In particular, we focus our attention on the wealth effects a securities class action filing has on the "new" and "old" shareholders of the firm, i.e. the current shareholders who bear the costs of the litigation process and the plaintiffs who receive a portion of the eventual settlement. A second part of our study employs a large sample analysis of the stock market reaction to securities class action lawsuits and settlement announcements. The last part of our study examines the impact of two recent security law reforms, the 1995 Private Securities Litigation Reform Act and the 1998 Securities Litigation Uniform Standards Act, on litigation and settlement activity. (Abstract shortened by UMI.)