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The Screening Effect of the Private Securities Litigation Reform Act
Author(s) -
Choi Stephen J.,
Nelson Karen K.,
Pritchard A. C.
Publication year - 2009
Publication title -
journal of empirical legal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.529
H-Index - 24
eISSN - 1740-1461
pISSN - 1740-1453
DOI - 10.1111/j.1740-1461.2009.01137.x
Subject(s) - securities fraud , insider trading , insider , settlement (finance) , class action , business , litigation risk analysis , economics , actuarial science , accounting , law and economics , financial economics , monetary economics , law , finance , political science , state (computer science) , audit , supreme court , algorithm , computer science , payment
Prior research shows that the Private Securities Litigation Reform Act (PSLRA) increased the significance of merit‐related factors in determining the incidence and outcomes of securities fraud class actions (Johnson et al. 2007). We examine two possible explanations for this finding: the PSLRA may have reduced the incidence of nonmeritorious litigation, or it may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre‐PSLRA. We find no evidence that pre‐PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. There is evidence, however, that pre‐PSLRA nonnuisance claims would be less likely to be filed under the PSLRA regime. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking hard evidence of securities fraud or abnormal insider trading. We find only limited evidence of a similar screening effect for case outcomes.