• Event Studies and the Law--Part I: Technique and Corporate Litigation

      Bhagat, Sanjai; Romano, Roberta (2001-05-01)
      Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.
    • Event Studies and the Law: Part II--Empirical Studies and Corporate Law

      Bhagat, Sanjai; Romano, Roberta (2001-05-09)
      This paper is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology’s application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The paper concludes by sketching the methodology’s use in evaluating the economic effects of regulation. While event studies’ usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.
    • The Need for Competition in International Securities Regulation

      Romano, Roberta (2001-08-06)
      This paper advocates opening up international securities regulation to greater regulatory competition than the scant competition that exists at present. After sketching the contours of an international regime of regulatory competition in securities laws and the reasons why such competition is desirable, the paper provides a detailed response to objections that have been raised to a proposal for a competitive securities regime that was principally focused on the United States, objections that would accordingly also be raised against this paper’s proposal. These include whether the U.S. securities regime is directed at mitigating problems regarding disclosure of interfirm externalities and whether international competition will result in a regulatory race to the lowest level of disclosure. Because the analysis in support of regulatory competition in securities law draws upon the learning regarding competition across U.S. states over the production of corporate law, which has been successful in creating a regime that, on balance, benefits shareholders, the paper concludes by demonstrating that recent critiques of the efficacy of statecharter competition are unfounded.