Essays on Institutional Investors and Securities Class Actions = 기관투자자와 주주집단소송에 관한 연구

다국어 초록 (Multilingual Abstract)

This dissertation is comprised of two essays on institutional investors and securities class actions. The first essay, entitled “Institutional Investors’ Portfolio Adjustment after Shareholder Litigation,” examines how institutional investors change their investment behavior toward non-litigated investees after experiencing litigation. Prior studies report that institutional investors play a key role in securities class actions by monitoring the court process, inducing favorable litigation outcomes for plaintiffs and improving governance in the litigated firms. I extend the prior studies by focusing on changes in the investment strategy of institutional investors after litigation. Using a sample of 102,234 institution-quarter observations in the U.S. over the 2006–2017 period, I document the following. First, institutional investors tilt their portfolios toward investees with higher financial reporting quality after experiencing litigation. Their portfolio adjustments following litigation are interpreted as an attempt to reduce ex ante litigation risk at the portfolio level. Second, the portfolio adjustments are less pronounced when institutional investors have a shorter investment horizon or when they stronger incentive to directly monitor investees’ agency conflicts. These results suggest that the portfolio adjustments based on financial reporting quality are less important when institutional investors heavily rely on private information in their short-term trading or when they benefit more from direct monitoring. Overall, this study provides evidence of the externalities of securities class actions in an investor’s portfolio and deepens the understanding of the economic consequences of securities class actions.
The second essay, entitled “One Leaves, Another Arrives: The Behavior of Hedge Funds around Shareholder Litigation,” investigates the behavior of hedge funds around shareholder litigation, focusing on their activist and trading strategies. Despite their key role in promoting effective governance, hedge funds have been discredited in the litigation setting. I attempt to reconcile this discrepancy by examining the economic decisions of hedge funds in the face of shareholder litigation. Using extensive U.S. data on securities class actions and hedge funds’ Schedule 13D filings during the 2001–2019 period, I document the following. Sued firms are more likely than control firms to be subject to hedge fund intervention following litigation. Compared with sued firms without such intervention, sued firms targeted by hedge funds improve their corporate governance and performance more significantly after litigation, consistent with hedge funds influencing the corporate actions of sued firms via voice. Further analysis reveals that such intervention is primarily driven by hedge funds that initiate their investments in a sued firm after litigation, but not by those that already held stakes in the sued firm before litigation. Hedge funds who held shares of the sued firm before litigation are more likely than other types of institutional investors to preemptively dispose of their stakes in the sued firm before litigation begins. This evidence is consistent with informed hedge funds deploying an exit strategy to deal with agency conflicts. Finally, hedge funds with more litigation experience are more likely to intervene in the management of other non-litigated firms in their investment portfolios. I interpret this result as evidence of the externalities of litigation on the behavior of hedge funds. In summary, this study provides a comprehensive understanding of the voice and exit strategies that hedge funds undertake around shareholder litigation.

목차 (Table of Contents)

• First essay: Institutional Investors' Portfolio Adjustment after Shareholder Litigation 1
• I. Introduction 2
• II. Literature Review and Hypothesis Development 9
• 2.1. Theoretical framework 9
• 2.1.1. Shareholder litigation and agency problems 9
• 2.1.2. Shareholder litigation and management reporting 11
• 2.1.3. Institutions in the context of shareholder litigation 12
• 2.2. Hypothesis Development 13
• 2.2.1. Institutions' litigation experience and portfolio management 13
• 2.2.2. Institutions' investment horizon and response to litigation experience 15
• 2.2.3. Institutions' monitoring incentive and response to litigation experience 17
• III. Research Design 19
• 3.1. Variable measurement 19
• 3.1.1. Institutions' experience of shareholder litigation 19
• 3.1.2. Financial reporting quality of investees in the portfolio 20
• 3.2. Model specifications 22
• 3.3. Data and sample construction 27
• IV. Empirical Results 29
• 4.1. Descriptive Statistics 29
• 4.2. Analysis of H1 31
• 4.3. Analysis of H2 33
• 4.4. Analysis of H3 34
• V. Additional Analyses 36
• 5.1. Newly purchased stocks versus existing stocks 36
• 5.2. Residual approach: abnormal experience of litigation 37
• 5.3. Change analyses 39
• 5.4. Alternative proxy for financial reporting quality 42
• 5.5. Effectiveness of learning from litigation experience 43
• 5.6. Long-term effect of litigation experience 44
• 5.7. Experience of meritorious versus frivolous litigation 45
• 5.8. Selling shares of investees with low financial reporting quality 46
• 5.9. Analysis of disclosure quantity 48
• VI. Concluding Remarks 51
• References 53
• Appendix I. Variable Definitions 59
• Appendix II. Classification of Institutions 62
• Second essay: One Leaves, Another Arrives: The Behavior of Hedge Funds around Shareholder Litigation 103
• I. Introduction 104
• II. Literature Review and Hypothesis Development 111
• 2.1. Review of the Related Literature 111
• 2.1.1. Hedge funds' activism and trading 111
• 2.1.2. Shareholder litigation, institutional investors, and hedge funds 114
• 2.2. Hypothesis Development 115
• 2.2.1. Hedge fund activism targeting sued firms 115
• 2.2.2. Economic consequences of hedge fund activism 117
• 2.2.3. Hedge funds' exit strategy 119
• 2.2.4. Hedge funds' learning from litigation experience 120
• III. Data Description and Sample Selection 122
• 3.1. Data sources 122
• 3.2. Sample selection of securities class actions 124
• 3.3. Sample selection of hedge funds' activist campaigns 126
• IV. Hedge Funds' Activism Targeting Sued Firms 127
• 4.1. Research design 127
• 4.1.1. Model specification 127
• 4.1.2. Sample construction and descriptive statistics 130
• 4.2. Empirical results 131
• 4.2.1. Baseline regressions 131
• 4.2.2. Existing versus new hedge funds 133
• 4.3. Additional tests 136
• 4.3.1. Comparison with other types of activists 136
• 4.3.2. Meritorious versus frivolous litigation 136
• 4.3.3. Moderating effect of liquidity 137
• V. Economic Consequences of Hedge Fund Activism 138
• 5.1. Research design 138
• 5.1.1. Model specification 138
• 5.1.2. Sample construction and descriptive statistics 140
• 5.2. Empirical results 141
• 5.2.1. Effect on corporate governance 141
• 5.2.2. Effect on firm performance 144
• VI. Hedge Funds' Exit Strategy 145
• 6.1. Research design 146
• 6.1.1. Model specification 146
• 6.1.2. Sample construction and descriptive statistics 148
• 6.2. Empirical results 149
• VII. Hedge Funds' Learning from Litigation Experience 149
• 7.1. Research design 150
• 7.1.1. Model specification 150
• 7.1.2. Sample construction and descriptive statistics 152
• 7.2. Empirical results 153
• 7.2.1. Baseline regressions 153
• 7.2.2. Litigation experience measured from alternative periods 155
• VIII. Concluding Remarks 156
• References 158
• Appendix I. Variable Definitions 165
• Appendix II. Estimation of Excessive CEO Compensation 169