Market Reaction to the Class Action Fairness Act of 2005

The Class Action Fairness Act of 2005 (CAFA) was signed into law on February 18, 2005. Prior to CAFA, plaintiffs found it easier for class action lawsuits to be tried in their preferred venue—state courts. Changes introduced by CAFA practically removed the majority of class action jurisdiction from state to federal courts. Since law and regulation might serve as an external corporate governance mechanism, an interesting question is whether CAFA has strengthened or weakened corporate governance. If CAFA improves corporate governance, associated marginal benefits would outweigh marginal costs. The opposite would be true if CAFA weakens corporate governance. This issue was hotly debated in the US Congress. The proponents argued that CAFA would reduce costs for the affected firms, while opponents argued the opposite. The main purpose of this paper is to examine which side of the debate is reflected in market reactions to various events that either enhanced or reduced the chances of the passage of CAFA. We identify the firms that are most likely to be affected by CAFA and find that the overall market reaction for these firms is positive when the likelihood of CAFA passage increases, while the reaction has been negative when the chance of its passage diminishes. We also hypothesize that firms that are more likely to be exposed to product liability litigation would experience a significantly higher (positive or negative) abnormal return than firms that are more likely to be involved in contract liability law suits. The results support this hypothesis. We also examine potential factors that might explain cross-sectional variations in abnormal returns and find that duality of Chairmanship and CEO has negative impact, while the

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Economics and Finance

Year

2010

Author dc:creator

• Wolfson, Shael Nathan

Contributors dc:contributor

• Mukherjee, Tarun
• Davis, J. Ronnie
• Krishnaswami, Sudha

• Class Action Fairness
• Regulatory Event
• SUR
• Event Study

Repository record dc:identifier

https://scholarworks.uno.edu/td/1116

OAI identifier oai:identifier

oai:scholarworks.uno.edu:td-2097