Allen Huang is a Professor of Accounting at Hong Kong University of Science and Technology. This post is based on an article forthcoming in Review of Finance by Professor Huang, Benedikt Franke, Reeyarn Zhiyang Li, and Hui Wang.
In the U.S., securities class actions (SCAs) are one of the most significant sources of legal liability for firms, allowing investors to potentially recoup investment losses caused by securities law violations. Although every legal system has a legislature that passes new securities laws and statutes, the doctrine of stare decisis grants judicial precedents a pivotal role in defining what qualifies as a securities law violation in the U.S. common-law system. Under the doctrine, each court should apply the principles and rules established in its own or a higher court’s prior rulings when deciding a case. Thus, the collection of rulings affects private enforcement of securities law and shapes firms’ litigation environment.
In a forthcoming article at the Review of Finance, we exploit the variations in securities law precedents across the U.S. Courts of Appeals—the circuit courts—to investigate how regional courts’ historical rulings influence firms’ legal liabilities related to financial misreporting. Despite the Supreme Court having ultimate jurisdiction over all cases, circuit courts effectively act as arbiters for the majority of SCAs. Each circuit establishes precedents through rulings on cases with distinct facts. Because case facts and random factors, such as the case sequence or judge assignments, affect ruling outcomes, each circuit’s precedent evolves in an idiosyncratic and path-dependent manner. The resulting different interpretations of the same securities law induce within-country and over-time variations in firms’ expected litigation costs associated with securities law violations.
