Do the Merits Matter Less after the Private Securities Litigation Reform Act?

Abstract

This study provides evidence on the impact of the Private Securities Litigation Reform Act (PSLRA) of 1995. Others have furnished evidence that the PSLRA increased the significance of merit-related factors in determining the incidence and outcomes of securities fraud class actions. This increase is consistent with two hypotheses. First, the PSLRA may have reduced solely the incidence of nuisance litigation. Second, the PSLRA may have also reduced meritorious claims where the additional costs imposed by the PSLRA made such claims unprofitable from the perspective of plaintiffs' attorneys. The study provides evidence that pre-PSLRA nonnuisance claims lacking obvious hard evidence indicia of fraud (an accounting restatement or Securities and Exchange Commission action) would have faced (1) a lower probability of suit in the post-PSLRA period and (2) a greater likelihood of receiving a dismissal or low-value settlement in the post-PSLRA period.