Sunday, August 06, 2006

Predicting Securities Class Actions

Last month, The Corporate Library (the "leading independent source for U.S. corporate governance and executive & director compensation information and analysis") released the 2006 update to their continuing study of the correlation between corporate governance ratings and the probability that a particular company will be the subject of a securities class action lawsuit.

While it isn't quite the "Pre-Crime Unit" that Bruce Carton has blogged about here and here over at Securities Litigation Watch, the study does present some interesting findings.

They include:
  • Companies rated in the bottom two categories ("D" or "F") are more than three times as likely to be the target of a securities class action lawsuit than those rated in the top three categories ("A," "B" or "C");
  • Excessive CEO compensation appears to be the single most predictive factor of being sued; and
  • Other predictive factors include director age, tenure, over-commitment and lack of independence.
Also of interest, according to the release, nearly all securities class action lawsuits are filed against companies with:
  • more than $485 million in market capitalization; and
  • average daily trading volume for target companies in the 52 weeks before being sued was between 2 and 25 million shares
The full report is available for purchase from The Corporate Library for $300, here.

Hat tip to Broc Romanek at

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