An analysis and the effects of class-action lawsuits

Abstract

Because class-action lawsuits are different in nature from other kinds of lawsuits, previous studies that examined the effect of lawsuits on corporate defendants without distinguishing between class-action lawsuits and non-class-action lawsuits missed an insight that separating the data could have provided. This study analyzes class-actions and contrasts the effects of class-action lawsuits with non-class-action lawsuits between 1990 through 1994. The results show that while the markets, generally, react negatively to the stocks of defendants on the announcement of non-class-action lawsuits, these reactions are limited to a smaller event-window. On the other hand, reactions to the announcement of class-action lawsuits are larger in magnitude and tend to occur over a larger event-window. In addition to being in accord with stylized beliefs on the effects of class-action, these findings also (1) explain why researchers need to analyze the effects of class-action lawsuits using larger event-windows, (2) explain the need to develop different strategies to address the different types of lawsuits, e.g. non-class-action and class-action lawsuits, and (3) offer an insight into strategies that the practitioner could develop to limit the devastating effects of class-action on the firm.