U.S. News and Word Reports

As reported by numerous news outlets, there may be some significant changes in the way securities fraud class actions are handled and how economic studies of stock prices, or event studies, are used in these types of cases.

Stock prices event studies are used in these cases to statistically measure the $ effect of an event, such as change in management or other major event that affects the company, on the firm’s stock price.

In my research, for example I have used event studies to look at the effect that a merger has on the target and acquiring banks stock price.  In securities class actions, event studies are used to determine the impact of the alleged fraud committed by the defendant firm.   The basic premise is that the fraud can be measured by the change in the firm’s stock price.

According to the WSJ,

The Supreme Court removed that requirement in 1988 when it adopted the “fraud-on-the-market” theory of reliance in Basic v. Levinson . According to the new theory, the price of shares traded on efficient secondary markets reflects all publicly available information, including any misrepresentations. Because the market sends information to the investor through a market price, the courts assumed that an investor relied on the integrity of the market price—and therefore on misinformation. Specific proof of actual reliance was no longer necessary.


The theory became the bedrock of securities class actions brought against companies that allegedly made a false statement to public markets. All investors who traded in the public market at issue could join a class action without proof that each investor actually heard or read the misstatement.


One set of law professors, has proposed having the requirement of an event study that shows some impact on price be performed before a class can be certified.