A Study Of The Impact Of Filing Of IPO Class-Action Lawsuits On Stockholder Wealth

Abstract

Companies undertaking initial public offering, in order to heighten public interest, sometimes disclose overly optimistic details and/or fail to disclose adverse information, in violation of the Securities and Exchange Commission's Rule 10(b)-5. This study examines the stock market reaction to the 71 Initial Public Offerings (IPO)-related lawsuits, filed in the period 1991-98.  We find that the filing of these lawsuits is associated with a significant loss of shareholder wealth.  This study also reveals that firms that misrepresent their future prospects and fail to disclose bad news experience the most significant decline in equity value