Shareholder Litigation: Deterrent Value, Merits and Litigants' Options
1 October 1995
By Dr. Vinita Juneja and Dr. Denise Martin with former NERA Senior Vice President Dr. Fred Dunbar
The paper contributes to the theoretical and empirical literature on shareholder litigation in four ways:
- The authors review the literature on the deterrent effects of class actions, noting contradictions, and verify that the current system cannot result in optimal deterrence;
- They demonstrate that the empirical research on the merits suffers from a lack of statistical rigor;
- They develop a model that shows how low-value settlements may represent the efficient resolution of meritorious claims, rather than "nuisance suit" settlements. They further explain plaintiffs' attorneys' behavior in arriving at settlements by viewing the shareholder class action as an option; and
- They test hypotheses and update portions of the empirical research using sophisticated statistical techniques.
This report was presented at Conference on Auditor and Director & Officer Liability for Misstated Financial Statements, sponsored by John M. Olin School of Business, Washington University, in St. Louis, Missouri, in October 1995.
