Do Shareholders Prefer Institutional Lead Plaintiffs?

Abstract

Previous research has documented that institutional lead plaintiffs are associated with higher settlements and marginal improvements to governance following securities class action lawsuits. In this study, we examine the market reaction to an institution being named as lead plaintiff to examine whether the market views the improvements in governance to be worth the higher costs. We find that the abnormal returns surrounding the announcement of an institutional lead plaintiff are significantly positive, and significantly larger than the negative market reaction to the appointment of a non-institutional lead plaintiff. However, we find only weak evidence showing that the reaction is more positive for firms in greater need of governance improvement, nor is the quality of governance a consideration in seeking to be lead plaintiff. Instead, our results suggest that the market reaction is more positive when institutions retain ownership in the defendant firm, suggesting that their long-term interests are seen as more aligned with other existing shareholders.