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Journal of Law, Economics, and Organization Advance Access originally published online on September 6, 2006
Journal of Law, Economics, and Organization 2007 23(3):627-652; doi:10.1093/jleo/ewm015
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© The Authors 2006. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act

Marilyn F. Johnson*

Michigan State University

Karen K. Nelson**

Rice University

AC Pritchard***

University of Michigan

* Eli Broad College of Business, Michigan State University.

** Jones Graduate School of Management, Rice University.

*** Law School, University of Michigan. Email: acplaw{at}umich.edu.

This article examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with our predictions, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and abnormal insider selling after the PSLRA. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements.

We appreciate the helpful comments of Jennifer Arlen, Bill Beaver, Ronald Mann, Roberta Romano, and two anonymous referees, as well as workshop participants at the American Enterprise Institute, American Law and Economics Association annual meeting, University of Alabama, University of California at Berkeley, Fordham University, George Mason University, University of Michigan, University of Texas, and Vanderbilt University. Daniel Spies provided invaluable research assistance. We thank PricewaterhouseCoopers for litigation data. Pritchard received financial support from the Cook Fund at the University of Michigan Law School. Johnson received financial support from PricewaterhouseCoopers.


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