Shareholder Wealth Effects of the Private Securities Litigation Reform Act of 1995

The purpose of this study is to measure the effect of the Act on firm value by investigating the reaction of common equity prices to the Act’s passage. Because key events late in the legislative process (i.e., a Presidential veto and subsequent Congressional override) were unexpected, our examination provides a relatively powerful test of the Act’s economic consequences. This study is important given recent calls for measures that provide shareholders with greater protection from financial reporting failures, including improving the quality of auditing, strengthening the audit committee process, and increasing enforcement activity by th Securities and Exchange Commision (SEC) (e.g., Levitt [1998], AICPA [1994; 1992], and National Association of Corporate Directors [1992]_. The Act’s impact on shareholder wealth is relevant to these discussions because it provides evidence on the changing cost of an alternative disciplining mechanism, the system of private securities litigation.