| Shareholder class action lawsuits brought under Rule 10b-5 have been a feature of the United States regulatory system since the 1940s. In recent years, a number of other countries have adopted similar provisions. Whether the presence of this type of litigation is net beneficial, however, is not clear. I examine market reactions to key legislative events in the enactment of a Canadian statute permitting 10b-5-style litigation. I find that investors expect value-increasing changes in firm behavior, but decreases in value due to expected litigation costs that outweigh the positive effects. I find that high litigation risk firms make less precise earnings forecasts in good news periods, and more precise forecasts in bad news periods. I also find some evidence of a decrease in liquidity for high litigation risk firms, but no change in analyst forecast errors or disclosure tone. |
