For years, the U.S. Chamber of Commerce has pressed Congress to restrict securities class action lawsuits, saying they put a damper on economic activity. Securities lawyers argue that such suits act as a crucial protection for investors, who deserve their day in court when deceitful actions by executives cost them money.
Now, some new research sheds light on this question.
Jonathan Rogers, an associate professor of accounting at the University of Chicago’s Booth School of Business, led an investigation into why some companies get sued while others do not.
Rogers, his Booth colleague Sarah Zechman and Andrew Van Buskirk of Ohio State University identified 165 companies that were sued because their share price fell after an earnings statement had pointed to strong future performance.
Booth and his coauthors then did something that I think added real value. They paired each of their 165 companies with a company in the same industry that was not sued, matching them for size and performance. Then they compared the earnings announcements of the two groups.
So why were 165 companies sued, but 165 similar companies were not?
First, the companies that were sued made unusually optimistic remarks about their future earnings, according to the paper, in the current issue of the American Accounting Association’s Accounting Review.