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By comparing the behavior of those US banks which faced Securities Class Actions (SCAs) in the 2000-2008 period with a control group of non-sued banks, we investigate the regulatory effects of this collective litigation procedure. The paper improves upon previous research by accounting for the endogenous nature of SCAs with respect to bank performance. This issue is addressed using an instrumental variable related to court severity. Two-Stage Least Squares estimates provide evidence that SCAs can stimulate more cautious attitudes towards risk, prompting the accumulation of reserves and recapitalization. We also find they are likely to enhance bank efficiency. However, our results also suggest that SCAs significantly increase dividend payouts while inducing a contraction of bank assets. SCAs are also likely to represent a warning signal of insolvency, as it emerges from the higher probability of being sued in case of high incidence of non-performing loans. We add an extension to the main analysis considering the probability of bank failures as a function of SCA occurrence. Results indicate that the latter is not likely to accelerate the former.

Securities Class Actions: A Helping Hand for Bank Regulators in Trouble?