The Capital Market Effects of Introducing Private Rights of Action in Securities Regulation: Evidence from the United Kingdom

Abstract

Securities class actions are among the most controversial topics in the corporate and securities law literature, but despite these actions’ significance, little is known about the impact of their introduction into the legal system. This paper contributes to filling this gap by examining the capital market effects of the adoption of private rights of action (PRAs) in the United Kingdom—a jurisdiction that provides a unique empirical setting for the analysis. The results indicate that the introduction of the rights was associated with enhanced market liquidity and value. Although this finding is most directly relevant to the cost-benefit analysis of private litigation in the United Kingdom, it also suggests that eliminating PRAs in jurisdictions that have adopted them (a reform that has been proposed in the United States) may lead to lower liquidity and market value.