Best-Fit Estimation of Damaged Volume in Shareholder Class Actions: The Multi-Sector, Multi-Trader Model of Investor Behavior

01 October 2000
By Dr. Marcia Kramer Mayer

How many shares are damaged by the fraud in a shareholder class action? In theory, this question can wait until resolution of the case, for it answers itself when claims are made. In practice, estimates of damaged shares are needed beforehand. Negotiating strategy, resource allocation and the size and structure of settlements are all influenced by defendants’ perceptions of their exposure and plaintiffs’ perceptions of their potential gain, both of which turn on aggregate damages. Damage per share and number of damaged shares - also known as damaged volume - together determine this aggregate, so developing an accurate estimate of damaged shares is important early on.

This paper challenges the popular single-trader (a.k.a., "proportional trading" or "proportional decay") model for estimating damaged volume, demonstrating that its assumptions about shareholder behavior are inconsistent with the evidence and strongly biased.

The multi-sector, multi-trader model of investor behavior that NERA employs to estimate damaged volume relies much more on data and less on assumption than the single-trader approach. The result is an estimate of damaged volume that is empirically grounded, free of bias and a lot closer to reality.