Essays on corporate fraud and securities class action suits.

摘要

This dissertation consists of two essays examining how corporate fraud and litigation impact on financial markets. The first essay examines the direct effects of these events and the second essay examines the indirect, or contagion, effects. The underlying theme behind both essays is that corporate fraud is a classic manifestation of agency cost/information asymmetry problems. The study consists of an examination of over 451 fraud and litigation cases between 1993 and 1999. Essay I reports that announcing firms experience serious wealth, volume, bid-ask spread, firm specific risk and systematic risk shifts in relation to both the fraud (F) and law-suit (C) disclosures. Moreover, these influences persist for an extended period beyond the events. Interestingly, systematic risk measures drop sharply following the events. The results suggest that these extreme agency events seriously “dislocate” normal market relationships (beta) and that firm specific risk becomes a pricing factor. We also find support for the argument that PSLRA represented a weakening in the monitoring and bonding regime available to shareholders. In the second essay we examine the pure contagion effects of the fraud and litigation cases. We start from the premise that as fraud events are firm-specific, which is the tenor of any lawsuit, then, if any industry wide contagion reaction were to occur it would be of the pure contagion form. Essay II's principal finding is that strong pure contagion responses are evident following both fraud (F) disclosures and class action (C) filings. In further analysis, we identify that the intensity of the contagion reactions is generally linked to well recognized measures of risk, notably: book-to-market ratios (Fama & French, 1993); leverage (Fama & French, 1988), up markets (or time varying risk premia (Fama & French, 1988)) and the level of regulatory protection (Ali and Kallapur, 2001). This link to risk is interesting as it suggests that contagion susceptibility may be predictable. These pure contagion results underline the continued threat that fraud and litigation represent to well functioning financial markets.