Securities class actions and operating performance
Abstract
Purpose
The purpose of this paper is to examine how the filing of a securities class action, and associated corrective actions taken by management, impact the operating performance of sued firms.
Design/methodology/approach
A matched sample is formed three years prior to the filing of a class action, as opposed to the traditional one year used in the literature. Match adjusted performance is analyzed from three years prior to the filing to five years after. Further the authors analyze the impact corrective actions have on operating performance.
Findings
The results show that operating underperformance happens considerably earlier than had hitherto been believed. Further, there is no evidence that the filing adversely affects performance, rather securities class actions appear to act as a turning point. The findings also indicate that firms that increase leverage post filing, experience subsequent increases in their operating performance.
Originality/value
The results show that rather than leading to a deterioration in performance, as is currently understood, the filing of a securities class actions results in improved operating performance. This improvement is, in part, associated with more optimal use of leverage by management. Overall, class actions appear to be an effective disciplinary mechanism.
Keywords
Acknowledgements
The authors are grateful for helpful comments received from Chaiporn Vithessonthi, the participant at the University of Otago, Department of Accountancy and Finance Seminar Series 2013 and at the University of Technology Sydney Seminar Series 2015, and the attendees at the 9th New Zealand Finance Colloquium/PhD Symposium (2015 Hamilton, NZ). This paper is developed from Matthew McCarten’s M.Bus research and work on it has been possible, thanks to the University of Otago Doctoral Scholarship. The usual disclaimer applies.
Citation
McCarten, M. and Diaz-Rainey, I. (2017), "Securities class actions and operating performance", Managerial Finance, Vol. 43 No. 1, pp. 44-58. https://doi.org/10.1108/MF-03-2016-0086
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited