Information Bundling and Securities Litigation

Abstract

We use the 2005 U.S. Supreme Court ruling in Dura Pharmaceuticals as a natural experiment to examine whether information bundling deters litigation and reduces settlement costs following accounting restatements. The 2005 ruling required that plaintiffs demonstrate an explicit connection between alleged misstatements and a stock price decline. We show that after the Dura ruling firms altered their information bundling strategies to reduce litigation risk. Specifically we examine two district forms of information bundling that can occur when a firm releases a restatement: “positive bundling,” the release of good news with the restatement, and “noise bundling,” the release of additional bad news with the restatement. We find that the smaller stock price declines associated with positive bundling make lawsuits less attractive. Noise bundling, which was a counterproductive litigation strategy before the Dura ruling, became an effective strategy after the ruling. Lawsuits against firms that used noise bundling were significantly more likely to be dismissed after the Dura ruling. On average, settlement amounts were $25 million and $18 million less for positive and noise bundled restatements, respectively. Our results highlight how a change in the legal environment can alter firms’ disclosure practices and reduce litigation risk.