The Screening Effect of the Private Securities Litigation Reform Act


  • We appreciate helpful comments from Un Kyung Park, an anonymous referee, and participants at the University of Michigan Law and Economics Workshop, the Eugene P. and Delia S. Murphy Conference on Corporate Law at the Fordham University School of Law, the Institute for Law and Economics Seminar at the University of Pennsylvania Law School, and the Future of Securities Fraud Litigation Conference sponsored by the Financial Economics Institute of Claremont McKenna College and RAND Corporation. Pritchard received financial support from the Cook Fund at the University of Michigan Law School. PricewaterhouseCoopers provided data on lawsuit filings.

*A. C. Pritchard, University of Michigan Law School, Ann Arbor, MI 48109; email: Choi is Murray and Kathleen Bring Professor of Law, New York University School of Law; Nelson is Associate Professor of Management, Rice University, Jones Graduate School of Management; Pritchard is Frances and George Skestos Professor of Law.


Prior research shows that the Private Securities Litigation Reform Act (PSLRA) increased the significance of merit-related factors in determining the incidence and outcomes of securities fraud class actions (Johnson et al. 2007). We examine two possible explanations for this finding: the PSLRA may have reduced the incidence of nonmeritorious litigation, or it may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. We find no evidence that pre-PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. There is evidence, however, that pre-PSLRA nonnuisance claims would be less likely to be filed under the PSLRA regime. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking hard evidence of securities fraud or abnormal insider trading. We find only limited evidence of a similar screening effect for case outcomes.