Institutional monitoring through shareholder litigation

Cheng-shing Cheng, Henry He Huang, Yinghua Li, Gerald Lobo

Research output: Journal article publicationJournal articleAcademic researchpeer-review

115 Citations (Scopus)

Abstract

This paper investigates the effectiveness of using securities class action lawsuits in monitoring defendant firms by institutional lead plaintiffs from two aspects: (1) immediate litigation outcomes, including the probability of surviving the motion to dismiss and the settlement amount, and (2) subsequent governance improvement such as changes in board independence. Using a large sample of securities lawsuits from 1996 to 2005, we show that institutional investors are more likely to serve as the lead plaintiff for lawsuits with certain characteristics. After controlling for these determinants of having an institutional lead plaintiff, we show that securities class actions with institutional owners as lead plaintiffs are less likely to be dismissed and have larger monetary settlements than securities class actions with individual lead plaintiffs. This effect exists for various types of institutions including public pension funds. We also find that, after the lawsuit filings, defendant firms with institutional lead plaintiffs experience greater improvement in their board independence than defendant firms with individual lead plaintiffs. Our study suggests that securities litigation is an effective disciplining tool for institutional owners.
Original languageEnglish
Pages (from-to)356-383
Number of pages28
JournalJournal of Financial Economics
Volume95
Issue number3
DOIs
Publication statusPublished - 1 Mar 2010
Externally publishedYes

Keywords

  • Corporate governance
  • Institutional investors
  • Monitoring
  • Shareholder litigation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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