Event Of Litigation Research Articles

The Shareholder Wealth Effects of Delaware Litigation

We collect data on the record of every action in over one thousand cases involving public companies from 2004 to 2011 in the Delaware Court of Chancery, which is the leading court for corporate law disputes in the United States. We use these data to estimate how markets respond to Delaware litigation events and characteristics such as case initiations, procedural motions, case quality, and judge identity. We find that negative abnormal returns are associated with the filing of derivative and contract cases, but we observe little effect associated with the filing of the average merger challenge. When we include measures of case quality, we see that higher quality cases increase the expected impact of derivative and contract litigation on firm value. We also develop evidence that tactics associated with multijurisdictional litigation are associated with a weakened impact of litigation on firm value. This evidence is consistent with the belief that the presence of litigation in another jurisdiction allows defense lawyers to bid down competing groups of plaintiffs’ lawyers during settlement negotiations. Finally, we show that abnormal returns are not associated with information on judicial assignment at the time of case filing, nor are they associated with judge identity at case resolution. These results suggest that the judicial impact on shareholder wealth at the time of judicial assignment and the time of case termination is too small to be statistically detected.

Auditor Litigation: Deterrence Implications for Non-sued Auditors

Litigation poses a significant business risk for auditors. We argue that auditors learn from other auditors’ litigation events and examine the consequences of such events for future accounting misstatements. Using a hand-collected sample of auditor litigation events, we find a significant subsequent decrease in misstatement frequency in within-industry audits conducted by auditors who did not face litigation. This industry-based across-auditor learning effect is (a) intensified when the litigation signal is stronger; (b) is associated with an audit-fee increase; and (c) is robust to a battery of controls including the use of a difference-in-difference approach. No evidence is found for region-based across-auditor learning. Since non-sued auditors conduct a larger share of audits than the sued auditor, a deterrence effect of litigation for the non-sued auditor significantly enhances the impact of litigation beyond the sued auditor.

Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias

Are event studies in securities litigation reliable? Basic’s fraud-on-the-market presumption sparked the wide use of event studies in securities litigation, and the Supreme Court’s 2014 decision in Halliburton will make event studies even more important, as litigants fight over the existence of a price impact before class certification. What is interesting about the use of the event studies in securities litigation, however, is that the methodology used in court differs from the methodology long-used in academic research. With few exceptions, securities litigation event studies are single-firm event studies, while almost all academic research event studies are multi-firm event studies. Multi-firm event studies are generally accepted in financial economics research, and peer-reviewed journals contain them by the hundreds. By contrast, single-firm event studies – the mainstay of modern securities fraud litigation – are almost nonexistent in peer-reviewed journals. Importing a methodology that economists developed for use with multiple firms into a single-firm context creates three substantial difficulties. First, single-firm event studies suffer from a severe signal-to-noise problem in that they lack statistical power to detect price impacts unless the price impacts are quite large. Inattention to statistical power lowers the deterrent effect of the securities laws by giving a “free pass” to some economically meaningful price impacts and may encourage more small- and mid-scale fraud on markets than is socially optimal given the costs of litigation. Second, single-firm event studies do not average away confounding effects. While this problem is well known, some courts have unrealistic expectations of litigants’ ability to quantitatively decompose observed price impacts into those caused by alleged fraud and those unrelated to alleged fraud. Third, low statistical power and confounding effects combine to generate sizeable upward bias in detected price impacts and therefore in damages. To improve the accuracy of adjudication in securities litigation, we suggest that litigants report the statistical power of their event studies, that courts allow litigants flexibility to deal with the problem of confounding effects, and that courts and litigants consider the possibility of upward bias in the detection of price impacts and the estimation of damages.

A Muddied Industry

A Muddied Industry

The Hidden Mines: How The “English Rule” On Prevailing Party Attorneys' Fees Can Apply In Cross-Border Litigation In American Courts

WITH the growing complexity and international nature of litigation in the United States, old bright line rules and customs have been increasingly abandoned by courts across the various U.S. jurisdictions for evaluating whether a particular statute or rule is deemed to be or for choice of law purposes. This is true with respect to the treatment of foreign party fee statutes, which varies greatly across the federal and state courts. A litigant should understand how the presiding court will treat a relevant foreign prevailing party fee statute since its applicability can have serious effects on the outcome of the litigation, especially for those litigants accustomed to the rule where each party bears its own attorneys' fees. This article provides an outline summarizing the pleading and procedural requirements for the recovery of attorneys' fees pursuant to a foreign prevailing party attorneys' fee statute. In addition, the article discusses the approaches utilized by the courts across the various jurisdictions for determining whether a foreign prevailing party attorneys' fee statute is treated as either or under a choice of law analysis. The article also discusses recognized factors militating against the application of a foreign prevailing party attorneys' fee statute even in circumstances where a choice of law analysis would otherwise justify its application. Finally, the article offers some practice pointers to litigants and transactional attorneys regarding how to maximize or minimize the likelihood that a particular foreign prevailing party attorneys' fee statute will apply in the event of litigation. I. Procedural And Pleading Issues Surrounding The Recovery Of Prevailing Party Attorneys' Fees (1) Courts have differed over the issue of when a party must plead or otherwise move to recover its attorneys' fees pursuant to a prevailing party attorneys' fee statute. Some jurisdictions maintain that a party must plead its intent to recover its attorneys' fees in its initial pleading consistent with Federal of Civil Procedure (FRCP) 9(g) because the attorneys' fees constitute damages within the scope of the rule. Other courts have held that the recovery of attorneys' fees pursuant to a prevailing party attorneys' fee statute falls within FRCP 54(d)(2) and must simply be made on a motion within fourteen (14) days after entry of judgment. Yet other courts have compromised between these two bright line approaches and have held that a party must offer its adversary reasonable notice of its intent to recover its attorneys' fees under a prevailing party attorneys' fee statute. These three approaches are discussed below. A. The Recovery Of Foreign Prevailing Party Attorneys' Fees As Special Damages Under FRCP 9(g) FRCP 9 governs the pleading rules for Special Matters and provides the requisite content a plaintiff or counterclaimant must include in his initial pleadings to allege certain types of claims including, among other things, fraud and special damages. FRCP 9(g) titled Special Damages provides: If an item of special damage is claimed, it must be specifically stated. In an attempt to escape the old bright line rule of lex fori in which the recovery of attorneys' fees were deemed procedural in nature thereby ensuring that the American Rule applied notwithstanding the application of foreign substantive law to the underlying claims in issue, prevailing parties in international litigation began arguing that foreign prevailing party attorneys' fee statutes were substantive in nature. Several courts have held that parties intending to recover their attorneys' fees under prevailing party attorneys' fee statutes must plead their intent to recover said fees in their initial pleadings because the attorneys' fees constitute damages within the scope of FRCP 9(g) and failure to do so results in waiver of the rights to those damages. …

U.S. Class Action Lawsuits Targeting Foreign Firms: The Spill-Over Effect

We find negative price reactions among non-sued U.S.-listed foreign firms to filings of U.S. shareholder lawsuits targeting foreign issuers. This spillover effect is stronger among non-sued firms from the sued-company’s home country or industry, especially when the home country is poorly governed or the industry is litigation-prone, and for less anticipated lawsuits. We also document a stronger same-country spillover for a recent wave of U.S. lawsuits targeting Chinese issuers than for other standalone litigations. Finally, a non-sued firm’ litigation price reaction predicts its future litigation risk. Our findings are consistent with investors updating litigation risks of peer firms upon litigation events, and highlight the importance of U.S. shareholder lawsuits in disciplining foreign issuers.

Executive Pay–Performance Sensitivity and Litigation

Although the standard principal-agent model predicts a negative relation between incentive strength (i.e., pay-performance-sensitivity or PPS) and firm risk, the empirical evidence is mixed (Prendergast, 2002). This study revisits this prediction. Using carefully selected litigation events to conduct a comparative static analysis, we show that firm risk, post lawsuit filing, increases by about 11% for our sample. We then document that the incremental PPS (measured by the correlation between executive’s annual compensation and shareholders’ wealth) drops after the company is sued, although the total value of compensation remains relatively unchanged. Once a lawsuit case is closed, we find that both firm risk and the incremental PPS revert back (risk goes down and incremental PPS goes up). Finally, we use the instrumental variable approach to test the relation between PPS level (measured by the sensitivity between executive’s wealth and shareholders’ wealth) and firm risk directly, and again find that, cross-sectionally, firm risk is negatively correlated with PPS level. Our evidences suggest that the standard principal-agent model prediction holds well and that executive’s incentives are indeed negatively related to firm risk.

Measuring Operations with Forensic Systems Analysis

Product liability has long been a specialized study of law, and forensic approaches to product failure are well developed. However, the concept of process liability has yet to be established in litigation. In the event of litigation concerning corporate operations, the quality management system (QMS) is a major issue, and a properly prepared legal strategy will seek to place evidence of system effectiveness into discovery. The QMS includes those processes of à priori and à posteriori design and development, and hence, the analyses of research and forensic labs. However, forensic study of operations is not well developed and even less so in regard to the QMS.This paper presents a nonstatistical approach to a forensic study of the QMS by using evidence from discovery while adhering to statistical discipline where appropriate. The conclusions of this research are that: 1) the QMS is an entity in law; 2) there is a need for greater study in the application of forensic engineering to operations and to discovery; and 3) there is a need for improved understanding between the professions of law, business, and science concerning the role of the QMS in operations of manufacturing and service.

Histopathologic Patterns Associated with External Agents

A large number of foreign substances may penetrate the skin for both voluntary and involuntary reasons. The voluntary group includes the particulate materials used in tattoos and cosmetic fillers, whereas the involuntary group is almost always caused by accidental inclusion of external substances secondary to cutaneous trauma. This article focuses on the histopathologic findings seen in cutaneous reactions to exogenous agents, with special emphasis on the microscopic morphology of the external particles in recognizing specifically the involved substance (something that is becoming increasingly important in the event of litigation).

Supporting workplace dispute resolution in smaller businesses: policy perspectives and operational realities

Following the 2007 Gibbons review and the subsequent repeal of the statutory grievance and disciplinary procedures in April 2009, the resolution of workplace conflict through alternative dispute resolution (ADR) continues to be a topical issue in the UK. Using a qualitative case study methodology, this paper examines the approaches to dispute resolution adopted by owners and managers in small businesses and the operational realities that shape their handling of individual disputes. The findings reveal a support for early and informal conflict resolution, but also a lack of knowledge about ADR and what it can offer. The conclusion is that, whilst ADR offers real benefits to small business employers and their employees, the dominant concern of these parties appears to be their ability to defend decisions they have taken in the event of litigation.

Short Interest as a Signal to Issue Equity

This paper examines whether corporate managers follow the collective actions of arbitrageurs, measured by short interest, in deciding whether to conduct seasoned equity offers (SEOs). We find that short interest predicts future SEOs and has a marginal impact comparable to well-known predictors. In economic terms, the probability of an SEO announcement increases by 36% for firms in the top quintile of short interest and decreases by 61% for firms in the bottom quintile. Importantly, we identify a causal impact of short interest on SEO issuance using a novel instrument for short interest based on future litigation events that are likely known by outsiders better than by insiders. Further evidence demonstrates that high short interest leads to a share price correction in the coming months, thereby signaling to managers a closing window of opportunity to issue overpriced shares. Taken together, our findings suggest that the secondary market has a significant impact on real corporate decisions through the observed arbitrage activities of sophisticated investors.

An Examination of the Non-Recruit Clause in Intercollegiate Coaching Contracts

Contracts of coaches in intercollegiate athletics, that were once simple and straightforward, have morphed into an ever more intricate combination of the demands from an institution. As these specific expectations of coaches increase, both parties may intensify their efforts to protect themselves in the event of litigation. In recent years there have been several high profile cases dealing with breach of contract claims by either the coach or institution. This paper takes an extensive look at the legality of a non-recruit clause within the Marist College v. Matthew Brady case. After reviewing the facts of the case, the paper will put attention on the non-recruit provision and whether it’s inclusion in the contract constitutes a valid non-compete clause or is a violation of public policy since it could potentially interfere with educational opportunities. The last segment will conclude with a recommendation for athletic administrators on how to structure such clauses in future coaching contracts.

Troublesome Tidings? Investors’ Response to a Wells Notice

Scant evidence has amassed about how a Wells notice might affect stock prices. We find that prices fall significantly in the three days around a first-time Wells disclosure and, for disclosures that involve subsequent timely litigation, stock prices drop more sharply, by more than three percent. For companies that report the receipt date of a Wells notice, we observe no market reaction on that date but, rather, a negative reaction 2-4 days after receipt date, especially for disclosures made in a later 10-Q or 10-K. These results suggest that prior studies of market reaction to SEC or shareholder litigation events may have understated investors’ response. Consistent with investors’ negative response to a Wells notice, we further find a significant shift from insider buying to selling up to four weeks before disclosure, although this tracks best with stock return in the same period. From the standpoint of disclosure policy, our results imply that investors consider a Wells disclosure as a material event.

Internet Hotel Reservations: Recent Changes and Trends in the Enforcement of Click Wrap and Browse Wrap “Terms and Conditions/Terms of Use”

“Click wrap” and “browse wrap” agreements attempt to add additional terms and conditions to the online hotel reservation contract made by a guest. If the terms are enforced by a court, they will provide some advantages to the hotel in the event of litigation involving the guest. Provisions might include choice of forum, choice of law, mandatory arbitration, limitation on types of damages, limitation of class actions, waiver of liability, liquidated damages, and restrictions on legal fees; and they may become part of the Internet-based contract when a guest reserves a room. Before enforcing the additional terms, however, a court must first determine that mutual assent to the additional provisions exists between the parties. Click wrap agreements will be routinely enforced by the courts, as the guest is required to click an icon that states, “I agree to the additional terms and conditions.” In a browse wrap agreement, the hotel Internet site has a link, usually found at the bottom of the webpage and in small print, that is accessible to the guest by clicking the link. The guest may or may not choose to view the additional terms and conditions prior to making the reservation, and the guest may not even be aware that the additional terms and conditions exist. Courts will only enforce terms and conditions of a browse wrap agreement if they are able to determine that mutual assent is present and that the guest is aware or should have been aware of the additional terms.

Risk and Incentive: An Event Study Approach

Although the standard principal-agent model predicts a negative relation between incentive strength (i.e., pay-performance-sensitivity or PPS) and firm risk, the empirical evidence is mixed (Prendergast, 2002). This study revisits this prediction. Using carefully selected litigation events to conduct a comparative static analysis, we show that firm risk, post lawsuit filing, increases by about 11% for our sample. We then document that the incremental PPS (measured by the correlation between executive’s annual compensation and shareholders’ wealth) drops after the company is sued, although the total value of compensation remains relatively unchanged. Once a lawsuit case is closed, we find that both firm risk and the incremental PPS revert back (risk goes down and incremental PPS goes up). Finally, we use the instrumental variable approach to test the relation between PPS level (measured by the sensitivity between executive’s wealth and shareholders’ wealth) and firm risk directly, and again find that, cross-sectionally, firm risk is negatively correlated with PPS level. Our evidences suggest that the standard principal-agent model prediction holds well and that executive’s incentives are indeed negatively related to firm risk.

Learning from Variation in Abnormal Returns in Litigation Event Studies: The Case of Trial Verdicts in Medical Products Mass Torts

Uses a Bayesian model updating of investors' beliefs about eventual defendant costs of resolving mass torts to guide empirical analysis of variation in responses of the values of defendant firms to trial verdicts within medical products mass torts.

Obstetricians' opinions and attitudes toward maternal refusal of recommended cesarean delivery in Nigeria

Objective To assess the opinions and attitudes of Nigerian obstetricians toward women's refusal of cesarean delivery. Method We used a questionnaire with 5 clinical scenarios drawn from published cases in which Nigerian women refused to undergo a recommended cesarean delivery. Results Most obstetricians (84.8%) advocated continuous counseling of these women but, from their response to the scenarios, few (13.7%–16.1%) would actually do so. Insufficient facilities and poor logistics for emergency obstetric care were their stated major reason for not respecting maternal choices in situations where vaginal delivery could have been given a chance. Conclusion The possibility of providing emergency obstetric care would remove many indications for cesarean delivery from the list of absolute indications in Nigeria; and management guidelines would protect obstetricians in the event of litigation, and improve their acceptance and respect of maternal choice.

Toward More Effective Risk Prevention

Reviews of medical malpractice claims against ophthalmologists have revealed a pattern of misunderstanding and improper or underutilization of several risk prevention and defense techniques. This often results in increasing the risk of litigation and weakening the defense of the claims. These techniques include the physician–attorney relationship, dealing with differences in the patient's version of the facts versus that of the physician (he said–she said), the physician–patient relationship, informed refusal, awareness of whom we are trying to convince with our arguments, vicarious liability, subpoena duces tecum, the most dangerous diagnosis, and the management of unethical plaintiff witnesses. Many of these techniques have been extensively described in the literature. This article discusses the means by which to make optimal use of them in order to achieve maximal risk prevention and the strongest possible defense in the event of litigation.

Shareholder litigation and changes in disclosure behavior

We examine changes in the disclosure behavior of firms involved in 827 disclosure-related class-action securities litigation cases filed between 1996 and 2005. We find no evidence that the firms in our sample respond to the litigation event by increasing or improving their disclosures to investors. Rather, we find consistent evidence that firms reduce the level of information provided post-litigation. Our results suggest that the litigation process encourages firms to decrease the provision of disclosures for which they may later be held accountable, despite the increased protections afforded by the Private Securities Litigation Reform Act of 1995.

Litigation Risk and Executive Compensation

Standard principal-agent theory predicts that the pay-performance sensitivity (PPS) decreases in the risk of the firm. An alternative literature argues that entrenched executives as in weak governance firms use compensation contract to extract the rent, which renders risk irrelevant. This paper uses event study approach to test both principal-agent model and CEO power theory by examining how litigation events affect executive compensation. We examine how the litigation event affects both executive compensation incentive (PPS) and the compensation composition (equity pay versus cash pay). Consistent with principal-agent model prediction, we find that, after the initiation of litigation, PPS drops, performance-invariant component of the compensation (cash) increases and performance sensitivity component compensation (equity) decreases. Complementing analysis using litigation settlement as risk decreasing event provides further evidence that PPS increases after settlement and compensation shifts from cash back to equity. To test CEO power theory, we partition the event firms into firms with good and bad corporate governance. We find that the PPS in firms with bad corporate governance increases after lawsuit and decreases after the settlement, consistent with the story that litigation brings the bad compensation practice of poorly governed firms under the and forces firms to discipline their CEOs more during the litigation period. Overall, our empirical evidence shows that for the overall sample and particularly for the subsample of firms with good corporate governance, compensation pattern changes around corporate litigation are consistent with the predictions of standard principal agent theory. That being said, CEO power does seem to also play a role, as firms with bad corporate governance exhibit a pattern that is more consistent with a limelight effect around the litigation events.