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Impact of Institutional Investors as Lead Plaintiffs on Litigation Outcomes, Board Independence, and Earnings Management
C.S. Agnes Cheng, Louisiana State University/university Of Houston
Henry Huang, Butler University
Yinghua Li, Purdue University
Gerald Lobo, University of Houston
ABSTRACT. This paper investigates whether having an institutional owner as the lead plaintiff in a class action lawsuit impacts the litigation results as well as the defendant firm’s board independence and earnings management. Institutional owners have incentives to aggressively and vigorously pursue litigation success and are capable of reducing the litigation agency costs by closely monitoring the class action attorney. Using a large sample of securities litigations from 1996 to 2005, we document that lawsuits with institutional lead plaintiffs have larger settlement amounts. This result is robust to controlling for the self-selection bias that may result from institutional owners choosing to serve as lead plaintiffs only for cases with high merit and potentially large damage awards. We also show that after the lawsuit filings, defendant firms with institutional lead plaintiffs are more likely to increase their board independence and exhibit larger decreases in accounting accruals.
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