نظارت سازمانی از طریق شکایت های قانونی سهامداران
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|17847||2010||28 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 95, Issue 3, March 2010, Pages 356–383
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.
The monitoring role of institutional investors is essential for investor protection (Shleifer and Vishny, 1997). Prior research (e.g., Carleton, Nelson, and Weisbach, 1998) indicates that institutional investors could use private channels to monitor firms because they have greater access to management.4 When management does not comply with their demands, institutional investors can exert their monitoring power by publicly filing a proxy resolution (Gillan and Starks, 2000). However, studies generally suggest that this means of resolution is ineffective (Karpoff, 2001).5 In the case of managerial misconduct, and especially when damages are revealed, securities class action can be an effective mechanism for institutional investors to actively monitor the defendant firms (Romano, 1991). The effectiveness of monitoring by institutional owners through securities class action could be enhanced by having the institutional owners, instead of individuals, serve as the lead plaintiffs (Weiss and Beckerman, 1995). The Private Securities Litigation Reform Act (PSLRA) of 1995 established a provision requiring lead plaintiff status be granted to the plaintiff with the largest stake in the lawsuit. This provision is intended to encourage institutional owners to lead the lawsuit because it presumes that the largest stakeholders (likely institutional owners) are more capable of seeking better case outcomes for investors (Fisch, 2001). In this paper, we investigate the use of securities class actions by institutional owners to monitor defendant firms. Specifically, we investigate the determinants for institutional owners to step forward to serve as lead plaintiffs and the monitoring effectiveness of institutional investors (relative to individual investors) in serving as lead plaintiffs in securities class actions. To identify determinants of having an institutional lead plaintiff, we discuss the costs and benefits for institutional owners and develop surrogates for their incentive to serve.6 For monitoring effectiveness, we examine two aspects: (1) immediate litigation outcomes, specifically, the likelihood of the lawsuit's dismissal and the settlement amount if the lawsuit survives the motion to dismiss, and (2) subsequent governance reform, especially changes in the defendant firm's board independence.7 Monitoring solutions to the agency problem would be effective if the monitor could present credible threats to management (Denis, 2001). The large financial and reputation penalties associated with successful securities class actions can discipline management and deter it from committing future wrongdoings that could misinform investors and result in misallocation of economic resources (Johnson, Nelson, and Pritchard, 2000). Corporate governance improvement has been deemed an effective monitoring mechanism. For instance, Coffee (1991) states that strengthening the board's monitoring function of the defendant firm is an effective way of disciplining management and preventing future corporate misbehaviors. Thus, we examine institutional investors’ monitoring effectiveness by testing whether they can generate better litigation outcomes and improve subsequent corporate governance. We expect that institutions as lead plaintiffs are more effective than individuals in achieving litigation success in terms of both financial recoveries and governance improvements. The lead plaintiff in a class action lawsuit represents all class members in selecting and retaining the class counsel, monitoring the litigation process, and negotiating with the defendant. Consequently, the lead plaintiff plays a vital role in the class action litigation process. Institutional lead plaintiffs generally have larger financial stakes, stronger litigation support and expertise, and higher public profiles than individual lead plaintiffs who are typically controlled by the class counsel who prefers a quick settlement to aggressively litigating the lawsuit (Weiss and Beckerman, 1995). This suggests that institutional lead plaintiffs are more effective in reducing litigation agency costs by effectively monitoring the class counsel and have stronger incentives and more resources to vigorously seek litigation success than individual lead plaintiffs.8 Consequently, we expect that institutional owners serving as lead plaintiffs are more likely to increase the success rate of class action litigation and to achieve larger settlements. Institutional investors with larger than average investments tend to be more active in governance (Coffee, 1991; Black and Coffee, 1994) and long-term shareholders generally are more interested in building a strong governance system (Gillan and Starks, 2000). Institutional lead plaintiffs are more likely to have larger than average investments and to continue holding their investments in the defendant firms’ stocks than individual lead plaintiffs.9 As a result, institutional lead plaintiffs have greater incentives to require defendant firms to build stronger governance systems. Institutional investors, especially those heavily indexed, also have the motivation to pursue governance reform of some firms to encourage other firms to make proactive governance changes (Del Guercio and Hawkins, 1999; Hawley, Williams, and Miller, 1994). Securities class actions could provide these institutional investors a channel to demand governance reform and thereby to achieve the spillover effect of improving the governance quality of overall corporate America. Cox and Thomas (2006) suggest that improving corporate governance is a major incentive for institutional owners to serve as lead plaintiffs. Defendant firms could change their governance practices for at least two reasons. First, the large financial penalty and reputation damage could increase defendant firms’ awareness of the importance of corporate governance, and therefore they could voluntarily choose to improve their governance (Ferris, Jandik, Lawless, and Makhija, 2007). Second, institutional lead plaintiffs sometimes explicitly require governance reforms in the litigation negotiation process.10 Especially for large public institutions, achieving governance reform through securities litigation has become mainstream to prevent the recurrence of managerial misconduct (Wall Street Journal, 2005). While suggested by many scholars and practitioners, no studies to date provide systematic empirical evidence on governance reforms achieved by institutional lead plaintiffs. Our study attempts to bridge that gap. We believe that it is also important to examine whether the monitoring effects exist for different types of institutional lead plaintiffs. Because public pension fund managers could be especially motivated in leading securities’ litigation for political reasons and for maintaining their reputation (Murphy and Van Nuys, 1994; Woidtke, 2002), a larger lawsuit settlement is not necessarily better for pension fund beneficiaries and, therefore, might not indicate monitoring effectiveness of public pension funds. A comparison of lawsuit outcomes across various types of institutional lead plaintiffs then reveals insights on monitoring effectiveness of different institutions. Studies (e.g., Gillan and Starks, 2000) have shown that shareholder activism by public pension funds is more successful than activism by other types of institutions. This is because public pension funds tend to passively index a majority of their assets, and thus have a large amount of long-term shareholdings.11 Therefore, they could have more incentives to change management behavior and governance practices of companies in the overall market (Del Guercio and Hawkins, 1999). Public pension funds also try to exert more influence on management and are more active in initiating governance reforms (Gillan and Starks, 2000; Qiu, 2003). These findings suggest that public pension funds could be able to achieve better litigation outcomes and governance reform than other institutional investors. We start with a sample of 1,811 securities class actions filed between 1996 and 2005 to examine the trend of institutional investors serving as lead plaintiffs. Because PSLRA significantly altered securities litigation laws, we restrict the sample period to post-1995 to control for the potentially confounding effects of changes in the litigation environment. We find that institutional investors have gradually increased their involvement in securities class action lawsuits as indicated by the increasing percentages of lawsuits with institutional lead plaintiffs from 1995 to 2004. We also find that both public and union pension funds are actively assuming the lead plaintiff role in lawsuits. The free rider problem predicts that institutional owners will choose to serve as lead plaintiffs only if their expected benefits are greater than their expected costs (Romano, 1991). Determinants of having an institutional lead plaintiff, therefore, are important control variables for our evaluation of monitoring effectiveness of institutional owners in leading the lawsuits. Because institutional owners’ expected cost and benefit functions are not observable, we develop proxies in our empirical model of the determinants. We propose and find that when the likelihood of winning is high, the potential damage is large, and when the defendant firm is important to the institutional owners, institutional owners are more likely to step forward to serve as the lead plaintiff. Specifically, we find that institutional investors are more likely to serve as the lead plaintiff when the lawsuit involves an accounting-related allegation, has an accounting firm as the codefendant, has a longer class period, has a larger negative market reaction to the revelation event, and has a larger potential investor loss. The probability of having an institutional lead plaintiff is also higher when the defendant firm has a larger market capitalization, has a higher level of institutional holdings, and is operating in a high-tech industry. After controlling for these determinants of having an institutional lead plaintiff in our multivariate regression analysis, we find that, relative to lawsuits with an individual lead plaintiff, lawsuits with an institutional lead plaintiff are less likely to be dismissed and have significantly larger settlements. Further analysis indicates that all types of institutions show significantly better litigation outcomes with public pension funds generating the largest settlement amount. We also find that, within three years of filing the lawsuit, defendant firms with institutional lead plaintiffs experience greater improvement in board independence than those with individual lead plaintiffs. These results are robust to controlling for regulatory changes in the NYSE, NASDAQ, and Securities and Exchange Commission (SEC) corporate governance requirements during the sample period and for determinants of having an institutional lead plaintiff. We investigate institutional investors’ effectiveness as lead plaintiffs in achieving the multiple objectives of reaching larger settlements and improving corporate governance. Our study contributes to the literature on institutional monitoring by showing that securities class action is a viable mechanism for institutional investors to exert their monitoring power. First, we show that institutional lead plaintiffs are associated with more favorable immediate litigation outcomes, as indicated by the lower likelihood of case dismissal and larger settlement amounts. These results suggest that institutional lead plaintiffs are able to impose greater financial penalties on defendant firms than individual lead plaintiffs. Second, our evidence shows that the involvement of institutional investors is associated with more positive changes in defendant firms’ corporate governance. Third, we find our results are not driven solely by public pension fund lead plaintiffs. The impact on immediate litigation outcomes is also significant for union pension fund, mutual fund, and other institutional lead plaintiffs. Collectively, our empirical results are consistent with the hypothesis that institutional investors can effectively monitor defendant firms through litigation. The rest of our study is organized as follows. The next section reviews the related literature and develops our main hypotheses. Section 3 describes the data and sample selection, Section 4 discusses the research design and the empirical results, and Section 5 concludes the study.
نتیجه گیری انگلیسی
This paper examines whether securities litigation can be used by institutional investors as a mechanism to discipline and monitor defendant firms. Securities litigation has long been criticized as attorney-driven and ineffective in punishing defendant firms. We conjecture that, relative to individual investors, institutional investors are more resourceful and motivated to achieve more favorable immediate litigation outcomes once they choose to serve as the lead plaintiff. Furthermore, institutional investors have larger and longer-term interests in the defendant firms and in the health of corporate America and thus should be more motivated in pressing firms for governance reforms. Based on a large sample from 1996 to 2005, we find that institutional lead plaintiffs, as opposed to individual plaintiffs, increase the likelihood of the lawsuit surviving the motion to dismiss and help achieve larger settlements. This result holds for various types of institutional investors including public pension funds. We further find that defendant firms with institutional lead plaintiffs experience greater improvement in corporate governance subsequent to the lawsuit filing. These results are robust to controlling for the endogeneity that arises when institutional owners cherry-pick only those lawsuits with a large potential settlement and a higher likelihood of winning. Our paper contributes to the understanding of how institutional investors can use existing legal channels to exert their monitoring power and the impact of such institutional investors’ engagement on litigation outcomes. Our evidence indicates that institutional investors’ involvement in securities litigation enhances not only investors’ success in seeking financial recovery, but also the quality of the defendant firms’ corporate governance. In light of the ineffectiveness of traditional institutional monitoring channels (e.g., private communication and filing proposals, etc.) and the increasing number of securities litigations, institutional investors could use litigation as a mechanism to discipline management and to secure the long-term health of the firms. Several issues can be further explored by future research. First, anecdotal evidence shows that institutions that opt out of several mega cases have made larger financial recoveries than class members who stayed in the class action. Future research could examine whether opting out of class action to file individual lawsuits is a more effective monitoring tool than leading the class action. Second, an emerging literature on hedge fund activism (e.g., Brav, Jiang, Thomas, and Partnoy, 2008; Greenwood and Schor, 2007; Kahan and Rock, 2007; Klein and Zur, 2009) provides both anecdotal and empirical evidence that hedge funds have been successful in their attempts to influence corporate strategies, payout policies, and corporate governance. It would be interesting to investigate whether hedge funds use securities litigation to discipline and monitor corporations and whether the effects of hedge funds’ disciplining and monitoring efforts differ from those of pension funds.