Does the presence of a general counsel in top management affect securities class action lawsuits?

Abstract

Research Question/Issue

This study investigates the effect of the presence of a firm's general counsel on the top management team on the likelihood that a US publicly traded company is targeted by a securities class action (SCA).

Research Findings/Insights

Using a US sample of class action lawsuits against publicly traded companies, we provide evidence that firms whose top management includes the general counsel (TMC) are less likely to be involved in SCAs. We further investigate the association of the presence of a TMC with the subsequent four litigation outcomes: market reaction to the lawsuits, duration of the lawsuit process, dismissal of the lawsuit, and the settlement approved by the courts. We find that firms with a TMC experience more favorable consequences on all four dimensions of litigation outcomes. The results hold after controlling for endogeneity, unobserved firm-related omitted variable bias, and monitoring mechanisms.

Theoretical/Academic Implications

The findings support that establishing a TMC acts as an effective governance mechanism in reducing corporate litigation risk and adverse legal outcomes.

Practitioner/Policy Implications

Our evidence suggests that a TMC can help monitor operating and financial decisions. This study suggests that Section 307 of the Sarbanes–Oxley Act (SOX) works in terms of explicitly emphasizing the general counsel's responsibility. Thus, this study offers insights to policymakers who are interested in enhancing the function of the governance mechanism by which a corporate general counsel can influence the capital market.