Class-action lawsuits against financial companies would often be better aligned with the financial interests of the wronged investor if they were directed at corporate officers and advisors who oversaw questionable practices, rather than the actual corporation as a whole.
UC Assistant Professor of Law Lynn Bai looked at the impact of class-action suits on financial firms in a new study.
The authors discovered that frequently the long-term damage done to the firm that is sued impacts its viability going forward, a factor that could have negative consequences for investors who are still exposed via their holdings with the company. One way around this would be to target the suit to individuals most at fault – an idea that is more practical than ever in the era of multimillion-dollar compensation packages for high-level financial employees.
“Class actions hurt the reputation of the corporation, distract the attention of the management and, to the extent that settlement is reached, this money may come, at least partially, out of the corporation’s pocket, rather than the pocket of the insurance company,” says Bai.
She adds: “The lawsuit may impose financial distress on the part of the corporation and hurt its financial well-being. From the shareholders' point of view, they have brought the action hoping to be compensated in the form of a large settlement, but they are ultimately the owners of the corporation and, as such, they bear the full negative consequence that the class action may bring to the corporation.”
The new paper by Bai, Cox and Thomas examines two competing views on class-action suits against the current backdrop of consideration of new financial regulation reforms. One traditional school of thought says that the threat of such suits is a necessary deterrent that assures sound practices by financial firms. The other adheres to a deregulatory philosophy that such suits place American companies at a competitive disadvantage in the global financial marketplace while doing little to help the overall position of investors.
Audio clip of Lynn Bai discussing investor impact from lawsuits
The research looked at the impact class-action suits had on 480 companies that were defendants in recent class action suits who had settled the litigation brought against them. Those defendants were compared to companies in the same industries and of similar sizes on key financial parameters such as sales, operating income, liquidity, financial distress levels and stock market performances.
The study revealed evidence of deterioration in the defendants' operating efficiency and short-term liquidity as well as a higher propensity of filing bankruptcy after the lawsuit, relative to their peers. Moreover, stock prices plummeted upon the filing of the lawsuit and had not recovered even years after the lawsuits had been settled.
As one example of the kind of troubles these companies experience, consider what the study showed in regards to increases in risks of bankruptcy.
"The Altman's Z-score is a measure of the overall financial distress level of a company and is widely accepted as a powerful predictor of bankruptcy in the near-future," Bai says. "We found that our defendents had significantly lower Z-scores than comparable companies that were not involved in class-action lawsuits, which was a new finding."
Bai also points out that the negative impact might be even stronger than the paper indicates, as the study did not include those similar companies who went bankrupt prior to or at the settlement stage. That is among the questions the researchers hope to look into in the future, as well as issues such as how corporate governance has changed in the wake of class-action suits.
The authors conclude that the research in their paper offers some support to both schools of thought in the debate on the actual useful role of class-action suits, but the data shows undeniable negative impacts for both the corporations in question and, by extension, their shareholders.
“Our results invite thoughts on important legal issues," Bai says. "For example, if the class actions end up hurting the corporations, shouldn't we adjust our procedural rules such as the pleading standard so as to better guard against frivolous suits? Also, to keep the class action from hurting the corporation, shouldn't the law provide more incentives for shareholders to direct their actions against the officers of the corporation, who actually committed the fraud, rather than the corporation itself?”
Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik
RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung
At the Hannover Messe 2018, the Bundesanstalt für Materialforschung und-prüfung (BAM) will show how, in the future, astronauts could produce their own tools or spare parts in zero gravity using 3D printing. This will reduce, weight and transport costs for space missions. Visitors can experience the innovative additive manufacturing process live at the fair.
Powder-based additive manufacturing in zero gravity is the name of the project in which a component is produced by applying metallic powder layers and then...
Physicists at the Laboratory for Attosecond Physics, which is jointly run by Ludwig-Maximilians-Universität and the Max Planck Institute of Quantum Optics, have developed a high-power laser system that generates ultrashort pulses of light covering a large share of the mid-infrared spectrum. The researchers envisage a wide range of applications for the technology – in the early diagnosis of cancer, for instance.
Molecules are the building blocks of life. Like all other organisms, we are made of them. They control our biorhythm, and they can also reflect our state of...
University of Connecticut researchers have created a biodegradable composite made of silk fibers that can be used to repair broken load-bearing bones without the complications sometimes presented by other materials.
Repairing major load-bearing bones such as those in the leg can be a long and uncomfortable process.
Study published in the journal ACS Applied Materials & Interfaces is the outcome of an international effort that included teams from Dresden and Berlin in Germany, and the US.
Scientists at the Helmholtz-Zentrum Dresden-Rossendorf (HZDR) together with colleagues from the Helmholtz-Zentrum Berlin (HZB) and the University of Virginia...
Novel highly efficient and brilliant gamma-ray source: Based on model calculations, physicists of the Max PIanck Institute for Nuclear Physics in Heidelberg propose a novel method for an efficient high-brilliance gamma-ray source. A giant collimated gamma-ray pulse is generated from the interaction of a dense ultra-relativistic electron beam with a thin solid conductor. Energetic gamma-rays are copiously produced as the electron beam splits into filaments while propagating across the conductor. The resulting gamma-ray energy and flux enable novel experiments in nuclear and fundamental physics.
The typical wavelength of light interacting with an object of the microcosm scales with the size of this object. For atoms, this ranges from visible light to...
13.04.2018 | Event News
12.04.2018 | Event News
09.04.2018 | Event News
24.04.2018 | Life Sciences
24.04.2018 | Materials Sciences
24.04.2018 | Trade Fair News