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23 October 2014  

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See the latest research from the ECGI published in the ECGI Finance Working Paper series
Wed, 24 Sep 2014 16:08 GMT  
ECGI Finance Working Paper 439/2014

Pierre Chaigneau, HEC Montreal Alex Edmans, London Business School, University of Pennsylvania and ECGI Daniel Gottlieb, University of Pennsylvania

Submitted by
Alex Edmans
Informativeness principle, contract theory, principal-agent model, limited liability, pay-for-luck, relative performance evaluation, options

This paper shows that the informativeness principle does not automatically extend to settings with limited liability. Even if a signal is informative about effort, it may have no value for contracting. An agent with limited liability is paid zero for certain output realizations. Thus, even if these output realizations are accompanied by an unfavourable signal, the payment cannot fall further and so the principal cannot make use of the signal. Similarly, a principal with limited liability may be unable to increase payments after a favourable signal. We derive necessary and sufficient conditions for signals to have positive value. Under bilateral limited liability and a monotone likelihood ratio, the value of information is non-monotonic in output, and the principal is willing to pay more for information at intermediate output levels.

to view details and download this Working Paper from the SSRN website

All ECGI Working Papers in the Law and Finance series are available on the ECGI website at www.ecgi.org/wp
See the latest research from the ECGI published in the ECGI Law Working Paper series
Wed, 24 Sep 2014 17:37 GMT  
ECGI Law Working Paper 265/2014

C.N.V. Krishnan, Case Western Reserve University Steven Davidoff Solomon, University of California Randall Thomas, Vanderbilt University and ECGI

Submitted by
Randall Thomas
Shareholder class action lawsuits, mergers and acquisitions, M&A transactions, top plaintiffs’ law firms, law firm reputation, lawsuit activity, law suit success, law firm popularity, selection bias controls, Docket entries, Injunction Motion, Motion to Expedite, Motion for Dismiss, Delaware Court

Using a hand-collected sample of 1,739 class actions that challenge the fairness of M&A transactions from the period 2003 through 2012, we examine the effectiveness of plaintiffs’ law firms. We divide plaintiff law firms into top-10 and non-top-10 firms using various reputation measures. We further segregate top law firms into top 5 law firms based on their popularity with informed plaintiffs and ability to obtain large attorneys’ fees awards. We find that the presence of a top plaintiffs’ law firm is significantly and positively associated with a higher probability of lawsuit success. These results hold even after controlling for selection bias - the likelihood that top law firms get to pick better cases that have higher chances of success. We find that top plaintiffs’ law firms are significantly more active than other plaintiffs’ law firms: they file more documents in the cases they litigate and they are more likely to bring injunction motions to enjoin a transaction. Defendants are also less likely to file a motion to dismiss cases filed by top plaintiffs’ law firms. Overall, we find evidence that law firm litigation activity aids top law firms in their success, which, in turn, feeds into their popularity. Our results inform the debate over shareholder litigation generally as well as the appropriate method for appointing lead counsel in shareholder class action litigation.

to view details and download this Working Paper from the SSRN website

All ECGI Working Papers in the Law and Finance series are available on the ECGI website at www.ecgi.org/wp