Decoding Securities Class Actions: Determinants of Outcomes in the USA

The recent Representative Actions Directive of the European Commission, especially relevant for small investors and consumers makes it timely and necessary to examine the functionality of class actions to inform future policy development. In this context, the American jurisdiction functions as a valuable point of reference, given its well-established experience with such litigation. The research focuses on securities class actions, which are a prominent tool to create a deterrent impact on the companies whose wrongdoing has affected their stock prices. Inspired by fraud-market theory, securities class actions do protect both small and large investors. It becomes critically important to understand the factors that could impact the outcomes in these lawsuits. This study investigates the determinants of settlements in securities class actions, drawing on a hand-collected dataset of 1,241 cases. It analyses the influence of variables related to case merit, the strength of the defendant, and judicial characteristics. The findings reveal that meritorious lawsuits have higher chances of resulting in a settlement outcome. On the other hand, the market valuation of the defending firm reduces these chances. Additionally, judicial experience appears to facilitate settlement outcomes. These results contribute to a better understanding of the dynamics influencing settlements in class actions and offer insights for promoting informed policy decisions aimed at stimulating efficient settlement resolutions. JEL classifications: D53, G14, K22, K41