Event Studies and the Law: Part II: Empirical Studies of Corporate Law

This article is the second part of a review of the event studymethodology, which has proved to be one of the most successfuluses of econometrics in policy analysis. In this part we focuson the methodology's application to corporate law and corporategovernance issues. Event studies have played an important rolein the making of corporate law and in corporate law scholarship.The reason for this input is twofold. First, there is a matchbetween the methodology and subject matter: the goal of corporatelaw is to increase shareholder wealth, and event studies providea metric for measurement of the impact upon stock prices ofpolicy decisions. Second, because the participants in corporatelaw debates share the objective of corporate law, to adopt policiesthat enhance shareholder wealth, their disagreements are overthe means to achieve that end. Hence, the discourse can be empiricallyinformed. The article concludes by sketching the methodology'suse in evaluating the economic effects of regulation. Whileevent studies' usefulness for policy analysis is by now familiarin the corporate law setting, we hope that our two-part reviewwill suggest appropriate applications to other fields of law.     

Event Studies and the Law: Part I: Technique and Corporate Litigation

Event studies are among the most successful uses of econometricsin policy analysis. By providing an anchor for measuring theimpact of events on investor wealth, the methodology offersa fruitful means for evaluating the welfare implications ofprivate and government actions. This article is the first ina set of two that review the use and impact of the event studymethodology in the legal domain. This article begins by brieflyreviewing the event study methodology and its strengths andlimitations for policy analysis. It then reviews in detail howevent studies have been used to evaluate the wealth effectsof corporate litigation: defendants experience economicallymeaningful and statistically significant wealth losses uponthe filing of the suit, whereas plaintiff firms experience nosignificant wealth effects upon filing a lawsuit. Also, thereis a significant wealth increase for defendant firms when theysettle a suit with another firm, in contrast to other typesof plaintiffs, and in contrast to the settling plaintiff firms.These findings suggest that, at a minimum, lawsuits are nota value-enhancing way for corporations to settle their disagreementswith other corporations. In addition, the market appears toimpose a higher sanction on firms than actual criminal sanctions,and reputational losses are of equal magnitude for civil finesas for criminal ones. The article concludes with some recommendationsfor researchers: the standards for conducting an event studyare well established; researchers can increase the power ofan event study by increasing the sample size, and by narrowingthe public announcement period to as short a time frame as possible.The companion article reviews the use of event studies in corporatelaw and regulation.