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An Analysis of Securities Fraud Class Action Lawsuits: How Overvalued Equity and Related Factors Affect the Likelihood of Dismissals and the Magnitude of Settlements

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Date Issued:
2007
Summary:
Under Rule 10b-5 of the Securities Exchange Act of 1934, investors are provided a cause of action for losses resulting from management's intentionally deceptive disclosure or non-disclosure of information. Since lawsuits are costly, managers should be motivated to avoid a securities fraud class action. Prior research argues that managers attempt to mitigate the adverse effects of class actions by preempting negative eamings surprises (Skinner 1994 ). However, this study argues that when a firm is overvalued, managers have incentives to avoid value reducing disclosure, which may lead to the violation of securities fraud laws. I investigate this assertion by testing associations between overvalued equity and the two outcomes of a securities fraud class action: dismissals and settlements. Other relevant factors related to overvalued equity are also tested and measured. These other factors include cases where the lead plaintiff is an institution, the length of the class period, the intrinsic value of exercisable CEO in-the-money stock option holdings, and corporate governance as measured by a corporate governance score and the occurrence of a GAAP violation. Findings show that the likelihood of a non-dismissal increases when an institution is the lead plaintiff and CEOs of overvalued firms hold higher amounts of in-the-money options. In addition, results suggest that for overvalued firms, stronger governance increases the probability of a non-dismissal.
Title: An Analysis of Securities Fraud Class Action Lawsuits: How Overvalued Equity and Related Factors Affect the Likelihood of Dismissals and the Magnitude of Settlements.
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Name(s): Houmes, Robert
Skantz, Terrance R., Thesis advisor
Florida Atlantic University, Degree grantor
Type of Resource: text
Genre: Electronic Thesis Or Dissertation
Date Issued: 2007
Publisher: Florida Atlantic University
Place of Publication: Boca Raton, Fla.
Physical Form: application/pdf
Extent: 87 p.
Language(s): English
Summary: Under Rule 10b-5 of the Securities Exchange Act of 1934, investors are provided a cause of action for losses resulting from management's intentionally deceptive disclosure or non-disclosure of information. Since lawsuits are costly, managers should be motivated to avoid a securities fraud class action. Prior research argues that managers attempt to mitigate the adverse effects of class actions by preempting negative eamings surprises (Skinner 1994 ). However, this study argues that when a firm is overvalued, managers have incentives to avoid value reducing disclosure, which may lead to the violation of securities fraud laws. I investigate this assertion by testing associations between overvalued equity and the two outcomes of a securities fraud class action: dismissals and settlements. Other relevant factors related to overvalued equity are also tested and measured. These other factors include cases where the lead plaintiff is an institution, the length of the class period, the intrinsic value of exercisable CEO in-the-money stock option holdings, and corporate governance as measured by a corporate governance score and the occurrence of a GAAP violation. Findings show that the likelihood of a non-dismissal increases when an institution is the lead plaintiff and CEOs of overvalued firms hold higher amounts of in-the-money options. In addition, results suggest that for overvalued firms, stronger governance increases the probability of a non-dismissal.
Identifier: FA00000305 (IID)
Collection: FAU Electronic Theses and Dissertations Collection
Note(s): Dissertation (Ph.D.)--Florida Atlantic University, 2007.
College of Business
Subject(s): Class actions (Civil procedure)--United States
Securities fraud--United States
Corporations--Corrupt practices--United States
Held by: Florida Atlantic University Libraries
Persistent Link to This Record: http://purl.flvc.org/fau/fd/FA00000305
Sublocation: Digital Library
Use and Reproduction: Copyright © is held by the author, with permission granted to Florida Atlantic University to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.
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Host Institution: FAU
Is Part of Series: Florida Atlantic University Digital Library Collections.