Study: Class Actions Deter Financial Wrongdoing

Amid calls for new legislation and regulation to address misconduct in the financial industry, a new study produced jointly by two business schools points to a solution that is already up and running: class actions.  Accounting professors from the Rutgers Business School and Emory University’s Goizueta Business School have completed a study which concludes that class actions are strong deterrents to the misrepresentation of corporate financial projections and quarterly results, and even stronger deterrents to securities fraud.  The study’s preliminary findings are at odds with the prevalent caricature of class actions as targeting trivial, technical violations and benefitting only plaintiffs’ lawyers.  Moreover, the Rutgers/Emory study’s findings stand in contrast to apparent misgivings on the part the United States Supreme Court’s conservative bloc about the social utility of class actions, exemplified in recent decisions such as Concepcion v. AT&T and Dukes v. Wal-Mart.

Among the Rutgers/Emory study’s specific findings is the conclusion that companies that have been sued in a class action alleging financial misconduct are significantly less likely to engage in the practice of “discretionary accrual,” i.e., the practice of reporting revenue for unconsummated sales transactions.  While the study concluded that the optimal enforcement scenario entails both public and private efforts, it also found that private enforcement and public enforcement (by the Securities and Exchange Commission) are roughly equal in their deterrent effects.  Thus, given recent reductions in tax revenue and government budgets, the Rutgers/Emory study underscores the importance of private class actions.

The Rutgers/Emory study is currently being circulated for peer review and is expected to be published in early 2012.