An Analysis of Settlement and Merit Under Federal Securities Law: What Will Be the Effect of the Reform of 1995?
Posted: 10 Oct 1997
Date Written: August 1997
Abstract
In this paper we develop a game-theoretic model to (i) investigate settlement incentives under two different legal regimes: the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, and (ii) assess the correspondence between settlements and merits for these two regimes. We model settlement negotiations in a game with three players; a plaintiff and two defendants (a firm/manager and an auditor). We find that the negotiation process ends in settlement rather than litigation under both legal regimes. However, the regimes elicit different negotiation strategies on the part of the plaintiff which, in turn, precipitates different settlement/merits disparities. We find that under the 1995 Reform, equilibrium settlements reflect the underlying merits for the auditor more closely for a broad range of parameters, although not for all parameter levels.
JEL Classification: G18, K22
Suggested Citation: Suggested Citation