Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Financially Wronged? New Study Says Investors Should Go After Leadership Instead of Corporation Itself

28.04.2010
A new study by UC Assistant Professor of Law Lynn Bai and two colleagues quantifies the self-defeating aspects for shareholders who file class-action suits against corporations where they have holdings. As an alternative, the study says, target the corporate officers who signed off on the financial misdeeds.

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.

That’s one of the conclusions to come from a new paper authored by University of Cincinnati Assistant Professor of Law Lynn Bai, along with fellow law professors James D. Cox of the Duke University School of Law and Randall S. Thomas of the Vanderbilt University Law School. The paper, “Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms,” was just presented publicly for the first time and will appear in an upcoming edition of the University of Pennsylvania Law Review.

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?”

Carey Hoffman | EurekAlert!
Further information:
http://www.uc.edu
http://www.uc.edu/news/NR.aspx?id=11726

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Significantly more productivity in USP lasers

In recent years, lasers with ultrashort pulses (USP) down to the femtosecond range have become established on an industrial scale. They could advance some applications with the much-lauded “cold ablation” – if that meant they would then achieve more throughput. A new generation of process engineering that will address this issue in particular will be discussed at the “4th UKP Workshop – Ultrafast Laser Technology” in April 2017.

Even back in the 1990s, scientists were comparing materials processing with nanosecond, picosecond and femtosesecond pulses. The result was surprising:...

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

Closing the carbon loop

08.12.2016 | Life Sciences

Applicability of dynamic facilitation theory to binary hard disk systems

08.12.2016 | Physics and Astronomy

Scientists track chemical and structural evolution of catalytic nanoparticles in 3-D

08.12.2016 | Materials Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>