Tuesday, October 20, 2020 - 4:10pm to 5:45pm
Online Event

Law and Economics Colloquium


Adam Badawi
UC Berkeley Law School

How Informative Is the Text of Securities Complaints?

Tuesday October 20, 2020
4:10pm - 5:45pm

Abstract: Using the complaints from several thousand securities class actions filed from 1996 to 2019, this paper utilizes text analysis and machine learning to predict whether those lawsuits will settle or be dismissed. The strongest performing models are able to predict the outcome in these cases at rates of about 70 percent, which is a substantial improvement over baseline settlement rates. The models are also able to generate a probability that each case will settle and these estimates provide strong indications of future equity returns. A portfolio that goes long on the cases that are most likely to get dismissed and short on those that are most likely to settle earns substantial abnormal returns in the the ten-day window after the filing of the complaint. Beyond contributing to the literature on the relationship between law and asset prices, these findings have implications for several other areas of research. That it is easier to predict the outcomes of first-filed complaints relative to consolidated complaints provides empirical support for the observation that there is still something of a race to the courthouse in securities litigation. In addition, the predictive ability of the text in complaints suggests that failing to control for the content of securities complaints may be a source of omitted variable bias in research on securities litigation. Finally, while these models perform reasonably well, there is substantial room for improvement. This observation implies that, at least for the time being, predictive analytics should act as a complement to, rather than substitute for, human legal judgment

Adam Badawi is a Professor of Law at UC Berkeley. His primary research examines the role that lawyers, law firms, and other legal institutions play in corporate finance and in shareholder litigation. His recent work includes “Debt Contract Terms and Creditor Control” (under review); “The Shareholder Wealth Effects of Delaware Litigation” (with Daniel Chen), American Law and Economics Review (forthcoming, 2017); “Does the Quality of the Plaintiffs’ Law Firm Matter in Deal Litigation?” (with David Webber), The Journal of Corporation Law (2015) (selected for presentation at the Harvard/Stanford/Yale Junior Faculty Forum); “Appellate Lawmaking in a Judicial Hierarchy” (with Scott Baker), The Journal of Law and Economics (2015); and “Influence Costs and the Scope of Board Authority,” The Journal of Corporation Law (2014). Prior to joining the faculty of Berkeley Law in 2017, Badawi was a Professor of Law at Washington University in St. Louis. He has been a Visiting Professor at Northwestern Pritzker School of Law and he served as a Bigelow Fellow at the University of Chicago Law School. Before joining the academy he was a litigator in the San Francisco office of Munger, Tolles & Olson LLP and was a law clerk to the Hon. Michael McConnell of the Tenth Circuit Court of Appeals. 

For further workshop information contact events.law@utoronto.ca