The Price of Pay to Play in Securities Class Actions
Article first published online: 27 OCT 2011
© 2011, Copyright the Authors. Journal compilation © 2011, Cornell Law School and Wiley Periodicals, Inc.
Journal of Empirical Legal Studies
Volume 8, Issue 4, pages 650–681, December 2011
How to Cite
Choi, S. J., Johnson-Skinner, D. T. and Pritchard, A. C. (2011), The Price of Pay to Play in Securities Class Actions. Journal of Empirical Legal Studies, 8: 650–681. doi: 10.1111/j.1740-1461.2011.01236.x
- Issue published online: 27 OCT 2011
- Article first published online: 27 OCT 2011
We study the effect of campaign contributions to lead plaintiffs—“pay to play”—on the level of attorney fees in securities class actions. We find that state pension funds generally pay lower attorney fees when they serve as lead plaintiffs in securities class actions than do individual investors serving in that capacity, and larger funds negotiate for lower fees. This differential disappears, however, when we control for campaign contributions made to officials with influence over state pension funds. This effect is most pronounced when we focus on state pension funds that receive the largest campaign contributions and that associate repeatedly as lead plaintiff with a single plaintiff's attorney firm. Thus, pay to play appears to increase agency costs borne by shareholders in securities class actions, undermining one of Congress's principal goals in adopting the Private Securities Litigation Reform Act.