The paper provides evidence on the impact of the Private Securities Litigation Reform Act of 1995 (PSLRA) by examining a sample of initial public offerings from 1990 to 1999 facing a mix of Section 11 adn Rule 10b-5 antifraud claims. Others have provided evidence that the PSLRA increased the significance of merit-related factors in determining the incidence and aoutcomes of securities fraud class actions. The increase in the importance of merit-related factors, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of nuisance litigation. Second, the PSLRA may have redice the incidence of both nuisance litigation as well as a subset of the pre-PSLRA meritorious claims where the additional costs imposed by the PSLRA made such claims unprofitable from the perspective of plaintiffs' attorneys. This paper tests between these hypotheses and provides evidence that meritorious claims lacking obvious "hard evidence" indicia of fraud (an accounting restatement or SEC action) (a) are less likely to be filed post-PSLRA and (b) face a greater likelihood of receiving a dismissal or low-value settlement in the post-PSLRA period. In determing the welfare implications of blocking frivolous suits, policymakers should therefore consider the negative impact of the PSLRA in also discouraging a significant fraction of meritorious litigation.
Date of this Version
Stephen J. Choi, "Do the Merits Matter Less After the Private Securities Litigation Reform Act?" (September 2004). University of Southern California Law and Economics Working Paper Series. Working Paper 11.