July 04, 2005
More on the PSLRA
Posted by Darren Roulstone

Securities litigation reform is in the news lately after President Bush nominated Chris Cox (who sponsored the Private Securities Litigation Reform Act of 1995) to head the SEC.  The PSLRA has come under criticism; for example, Robert Kuttner (writing in BusinessWeek) states: "[The PSLRA made] accountants and executives far less liable for cooking corporate books. That law directly invited the abuses that led to Enron and MCI/Worldcom."

I don't believe those responsible for the Enron and Worldcom scandals needed much of an invitation to commit fraud.  And Bernard Ebbers (facing up to 85 years in prison) certainly wishes the PSLRA had made executives less liable for their crimes.  What I find interesting is that there exists research on the effects of the PSLRA and it is largely supportive of the act's provisions. 

Professor Bainbridge has commented on this research before (see here and here).  I'll add two more papers: The first finds the PSLRA's safe harbor provisions for disclosure lead to high-tech firms issuing more earnings and sales forecasts than before the act, with no deterioration in the quality of the forecasts.  The second (an updated version of one of the papers mentioned by Prof. Bainbridge) examines the determinants of securities litigation and finds that post-PSLRA, lawsuits are more strongly related to earnings restatements and sales by insiders than pre-PSLRA.  (Full disclosure: I know most of the authors of these papers; in particular, Karen Johnson is a good friend from grad school.)

Obviously, these papers are not definitive on this subject.  What they provide is empirical evidence on the consequences of the PSLRA.  Any criticism of the act (or its sponsors!) should make note of them and, hopefully, link the criticism to research documenting negative outcomes due to implementation of the PSLRA. 

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