Identifying ineffective monitors from securities class action lawsuits

• Main Authors: WEI, Chi Shen, ZHANG, Lei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Institutional investors; Securities class action litigation; Shareholder linkages; Corporate governance; Corporate Finance; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6573; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7572/viewcontent/Identifying_ineffective_monitors_from_securities_class_action_lawsuits_wp.pdf
• Institution: Singapore Management University

We identify “ineffective” institutional monitors based on the prevalence of occurrences of securities class-action lawsuits in their overall portfolio. We find that firms with a higher representation of such institutional investors among the firms’ large shareholders have a greater likelihood of future litigation and experience more negative market reactions upon such litigation filings. These firms exhibit other unfavorable governance outcomes including poorer acquisitions and lower CEO turnover-performance sensitivity. We find suggestive evidence that ineffective monitoring may be a result of higher operational risk.