The Effect of Security Class Action Lawsuits on the Behavior of Sell-side Analysts and the Informativeness of Their Reports

Shareholder security class action lawsuits are notable firm events in which a group of shareholders allege the intentional misrepresentation or omission of management disclosure. Rogers and Van Buskirk (2009) provide evidence consistent with management disclosure deteriorating after the filing of a lawsuit. In response to the lawsuit and changes in firm disclosure, investors likely demand additional information from other market participants to assess the impact of the lawsuit on the firm as well as to substitute for or validate management disclosure. In this paper, I argue that sell-side equity analysts have a comparative advantage in providing a portion of the additional information demanded by investors after the filing of a lawsuit. Using 653 security class action lawsuits obtained from the Stanford Securities Class Action Clearinghouse, I find evidence consistent with sell-side analysts providing more services, using more private information during the forecasting process, and having more informative reports after the filing of a lawsuit. I thank my dissertation chairpersons, Dawn Matsumoto and Terry Shevlin, for their guidance in developing this paper. I also thank the other members of my committee, Jonathan Karpoff, Ed Rice, Lan Shi, and Mark Soliman. I also thank Brad Blaylock, Robert Bowen, Dave Burgstahler, Andy Call, Dane Christensen, Ed deHaan, Mike Drake, Alex Edwards, Weili Ge, Frank Hodge, Allison Koester, D. Shores, Lloyd Tanlu, Jake Thornock, Amanda Winn, and workshop participants at the University of Washington and the BYU Accounting Symposium for their comments and suggestions. The securities class action lawsuit data was generously provided by the Stanford Securities Class Action Clearinghouse.