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The Price of Pay to Play in Securities Class Actions

Authors

  • Stephen J. Choi,

    1. New York University Law School
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  • Drew T. Johnson-Skinner,

    1. Lankler Siffert & Wohl LLP
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  • A. C. Pritchard

    Corresponding author
    1. University of Michigan Law School
      A. C. Pritchard, University of Michigan Law School, 625 S. State St., Ann Arbor, MI 48109-1215; email: acplaw@umich.edu. Choi is Murray and Kathleen Bring Professor, New York University Law School; Johnson-Skinner is Associate, Lankler Siffert & Wohl LLP; Pritchard is Frances and George Skestos Professor, University of Michigan Law School.
      We thank two anonymous referees, Sanjai Bhagat, Un Kyung Park, Roberta Romano, David Webber, and participants at the American Law and Economics 2010 Annual Meeting, the NYU-Penn Finance Conference, the 14th Annual Law and Business Conference at Vanderbilt Law School, the 2010 Conference on Empirical Legal Studies, and the University of Toronto Law School Law and Economics Workshop for helpful comments on earlier versions of this article.
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A. C. Pritchard, University of Michigan Law School, 625 S. State St., Ann Arbor, MI 48109-1215; email: acplaw@umich.edu. Choi is Murray and Kathleen Bring Professor, New York University Law School; Johnson-Skinner is Associate, Lankler Siffert & Wohl LLP; Pritchard is Frances and George Skestos Professor, University of Michigan Law School.
We thank two anonymous referees, Sanjai Bhagat, Un Kyung Park, Roberta Romano, David Webber, and participants at the American Law and Economics 2010 Annual Meeting, the NYU-Penn Finance Conference, the 14th Annual Law and Business Conference at Vanderbilt Law School, the 2010 Conference on Empirical Legal Studies, and the University of Toronto Law School Law and Economics Workshop for helpful comments on earlier versions of this article.

Abstract

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.

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