Two Essays on Asset Prices Around Securities Class Action Lawsuits

Essay 1: Prior studies on securities class action lawsuits have found that there are large negative abnormal returns and an increase in short-selling activity in the days preceding the lawsuit filing. These findings have largely been attributed to anticipatory inference and private information. However, our analysis of a large sample spanning 2009-2019 reveals that more than half of the lawsuits had a public announcement about the law firm investigation in the days leading up to the lawsuit filing. Strikingly, we find that the average cumulative abnormal return during the 10-day pre-filing period was: (1) over -17% for lawsuits with a pre-filing investigation announcement within this 10-day pre-filing window, and (2) only about -3% for the remaining cases. We observe similar patterns in the elevated short selling activity prior to the filing. Our evidence indicates that pre-filing abnormal returns and shorting are more about public news, and that investors’ ability to anticipate the filing of lawsuits (without recent public news about the potential lawsuit) is not as economically significant as earlier studies have suggested. Additionally, our findings provide support for the idea that short sellers are skilled at analyzing public information. Essay2: Existing literature is divided on the timeliness and magnitude of bondholders’ reaction to an economic event. Research supporting bondholders’ conservatism argues that bondholders react faster and stronger to the bad news compared to the stockholders. The competing view finds the bondholders being inattentive to the corporate news and reports a late and weaker bondholders’ reaction to news events suggesting underreaction. With the recent revelation about the importance of the Securities Class Action lawsuit Investigation Announcement as a public news event and stockholders’ reaction of a strong event and post-event window abnormal returns during the first news release, we probe bondholders’ reaction to Securities Class Action lawsuit Investigation and filing date announcements in this study. We found little support for bondholders’ conservatism. Our study, however, finds statistically significant negative abnormal returns during the filling date event window and no evidence of negative returns around the investigation news event. We conclude that the Securities Class Action lawsuits are important corporate events for bondholders, although they react slower and weaker to this ‘bad news’ event supporting the underreaction hypothesis.