Law Firm Expertise and Agency Problem in Securities Class Action Lawsuits

Abstract

Using securities class action lawsuits from 1996 to 2013, we document a measure of law firm expertise that predicts the outcome of future lawsuits conducted by law firms. We use prior Dismissed Ratio as law firm expertise. We find that law firms with a lower prior Dismissed Ratio are more likely to be skilled law firms with less agency problem. Cases conducted by skilled law firms with less agency problem are more likely to be settled, have more negative cumulative abnormal return during the filing date, win larger settlement amounts, result in a larger probability of CEO turnover and are associated with larger short interest one week prior to the filing event. Skilled law firms contribute to better outcomes by exerting more effort in the litigation process, as evident by the longer Case Length from filing date to status date. In addition, the market share of law firms increase after performing as skilled law firms and skilled law firms are less likely to disappear from the market. Overall, predictive power and persistence of law firm expertise suggest law firm fixed effect in securities class action lawsuits. Robustness tests suggest existence of law firm expertise beyond case selection.