The Screening Effect of the Private Securities Litigation Reform Act

Authors

Adam C. Pritchard, University of Michigan Law SchoolFollow
Stephen J. Choi, New York UniversityFollow
Karen K. Nelson, Rice University, Jones Graduate School of ManagementFollow

Document Type

Article

Publication Date

1-2009

Abstract

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.

Recommended Citation

Pritchard, Adam C. "The Screening Effect of the Private Securities Litigation Reform Act." S. J. Choi and K. K. Nelson, co-authors. J. Empirical Legal Stud. 6, no. 1 (2009): 35-68.