Institutional Activism through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions

In the Private Securities Litigation Reform Act of 1995, Congress created the lead plaintiff provision in the hope that institutions would closely monitor class counsel and thereby curb the agency costs that typically plague securities class actions. This paper uses a random sample of 627 preand post-PSLRA settlements to examine the efficacy of this provision. Specifically, the paper analyzes whether there is any correlation between the participation of one kind of institutional investor, public pension funds, and settlement outcomes, attorney effort, or attorneys’ fee requests or awards. The paper finds that cases with public pension lead plaintiffs have larger settlements, recover a greater percentage of the stakes at issue in the case, have greater attorney effort, and have lower fee requests and awards than cases with other types of lead plaintiffs. These findings suggest that public pensions do in fact act as effective monitors of class counsel.