The Effect of Securities Class Action Lawsuits on Investor Sentiment

The negative effect of corporate scandals and fraud has been studied in various capacities. My paper expands on existing literature that states that exposure to fraud decreases household stock market participation and thus adversely affects investor sentiment. I investigate whether the news of the filing and final judgement date of securities class action lawsuits affect sentiment around the accused company’s sector. I do this by running event studies for 10 class action cases across 4 sectors and looking at cumulative abnormal fund flows as an indicator of changing investor sentiment. I employ two main frameworks. First, I check if the filing and final judgment date of securities class action cases affect company-specific stock returns. I find significant negative cumulative abnormal returns in the filing period but not in final judgment period. This is consistent with the results of existing literature in the same area of study. I then look at sector-wide sentiment using ETF fund flows instead of returns because negative abnormal fund flows can signal investors shifting funds away from the sector or moving away from equity as a whole. I find a slight but not statistically significant drop in sector-wide investor sentiment on day 0 of the filing period, and a statistically significant positive average cumulative abnormal flow throughout most of the final judgment period