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Event Studies and the Law--Part I: Technique and Corporate Litigation
Sanjai Bhagat, Leeds School of Business
Roberta Romano, Yale Law School, Yale International Center for Finance and NBER
ABSTRACT:
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.
SUGGESTED CITATION:
Sanjai Bhagat and Roberta Romano,
"Event Studies and the Law--Part I: Technique and Corporate Litigation"
(May 1, 2001).
Yale Law School.
Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series.
Paper 259.
http://lsr.nellco.org/yale/lepp/papers/259
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