Sunday, August 22, 2010
The Pricing of Shares in Equity Markets with Securities Class Action Lawsuits, by Judson A. Caskey, University of California at Los Angeles - Anderson School of Management, was recently posted on SSRN. Here is the abstract:
This study develops an analytical model of a securities market in which investors can engage in securities class action lawsuits following a firm’s release of unfavorable news. Because all investors in the model have rational expectations, the model takes into account the fact that the buyers of the firm’s shares anticipate litigation, which reduces the price they are willing to pay and amplifies the price reaction to bad news. I derive the equilibrium prices in this model and apply it to the issues of manipulations of financial reports by the firm’s managers, litigation insurance and links between firm-specific information and cost of capital.