Securities Class Actions as Disciplinary Mechanisms: Debt Financing, Political Lobbying and Innovation

Abstract

This thesis examines the role of securities class actions (SCAs) in corporate governance. Three empirical chapters are presented examining the relationship SCAs have with debt financing, lobbying and firm innovation.

Chapter 2 examines the impact SCAs have on a firm’s debt financing and lending relationships, with particular focus on the lender’s reputation and a firm’s ex-ante relationship with its lenders. The results indicate that reputable lenders are better screeners and as a result are less likely to lend to high litigation risk firms. Turning to ex-ante relationships with lenders, the evidence indicates that firm’s that did not have a relationship with a lender are less likely to be able to develop one post-filing. On the other hand, if a firm had an established relationship with a lender before the filing, they are more likely to continue borrowing from that lender. Furthermore, for firms that had an existing relationship with a lender, loans initiated after the filing are larger in size and have smaller spreads relative to those firms without a relationship. Overall, it appears that corporate misconduct does not undermine a firm’s relationship with its providers of financial capital.

Chapter 3 examines the impact of lobbying on the time it takes to detect managerial misconduct and the size of penalties associated with SCAs. Managers of lobbying firms are able to get away with misconduct for longer and are marginally less likely to have to settle a class action up to 2004. From 2005 onwards, lobbying no longer impacts the time it takes to detect misconduct or the outcome of the case. It is argued that regulatory action (the Sarbanes Oxley Act) has had the desirable effect of reducing the tacit power of lobbying firms.

Finally, Chapter 4 examines the relationship between SCAs and firm innovation. The evidence indicates that innovative firms are relatively more likely to be sued. This chapter presents evidence that innovation may increase the opportunities and pressures to commit misconduct. Furthermore, investment in innovation immediately declines post-filing resulting in a decline in the quantity of patents. However, the filing has no impact on innovative quality or efficiency.