Are Event Studies in Securities Litigation Reliable? | The D&O Diary

Are Event Studies in Securities Litigation Reliable? | The D&O Diary

by Kevin LaCroix

"In its June 2014 opinion in the Halliburton case, the U.S. Supreme Court held that securities lawsuit defendants may introduce evidence at the class certification stage to try to show that the alleged misrepresentation on which the plaintiffs rely did not impact the defendant company’s share price. To show the absence of price impact, defendants typically will rely on “event study” methodology to analyze factors affecting a company’s share price.



The event study methodology has a well-established academic pedigree. But in a recent paper, two authors raise the question ask the question “Are event studies in securities litigation reliable?”

 

In their March 19, 2015 paper, “Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias” (here), Duke Business School Professor Alon Brav and J.B. Heaton of the Bartlit, Beck, Herman, Palanchar, & Scott law firm identify several problems in the way event studies are used in securities litigation. Their longer academic paper is summarized in a shorter April 14, 2015 post on the CLS Blue Sky Blog (here).

 

Event studies are used in securities litigation to try to answer two questions: First, was an alleged misrepresentation or corrective disclosure associated with a price impact? Second, if there was a price impact, how much of it was caused by the alleged misrepresentation or corrective disclosure as opposed to other, unrelated factors?"



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