Browsing by Subject "Lawsuits"
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Item Effect of lawsuits on stock price compared to product withdrawal: a focus on the consequences of Vioxx's adverse effects(Texas Tech University, 2006-08) Watson, Kimberly S.; Xu, Ke Tom; Steinmeier, Thomas L.Pharmaceutical companies are plagued with lawsuits in today’s society. Some companies will hastily remove a product from the market before the negative side effects of the drug can be fully established for fear of severe losses due to lawsuits. Lawsuits will occur whether the drug is left on the market or not, as seen with the multiple cases both decided and pending against Merck for their drug, Vioxx. Using stock analysis as a measurement, it is evident in the case of Vioxx that removing a product from market will have a more detrimental effect on the manufacturer than the lawsuits will. In the cases where a drug could ethically be left on the market with additional warnings for those that may experience negative side effects, it is better for the company to continue to market the product and endure the lawsuits than remove the product and face the lawsuits alone.Item The quality of disclosure and governance and their effect on litigation risk(2006-08) Mohan, Saumya; Starks, Laura T.This dissertation examines the relationship between three sets of variables: corporate governance and monitoring, the quality of disclosure in annual reports and securities class action litigation. In the first section, I present a game-theoretic model in which shareholders select from ex ante monitoring or ex post litigation mechanisms available to them in order to mitigate the agency problem. Firm characteristics determine the choice of which of these two mechanisms is appropriate for a particular company. I then test predictions from this model and find that firms with poor monitoring are much more likely than those with good monitoring to be sued even after controlling for the common determinants of a lawsuit. The second section of the dissertation relates the quality of disclosure in annual reports to litigation. I use a dataset containing annual reports filed electronically with the SEC in the period 1996-2005. Using two content analysis software programs that analyze the categories of words used in these annual reports, I find that firms that use more numbers, past and future words, and other informative words are much less likely to be sued, even after controlling for the common determinants of lawsuits. In order to avoid subjectively choosing categories, I use principal components analysis to identify the major components of annual report disclosure. When these components are used as regressors to identify causative factors of lawsuits, one component named 'informativeness' has significant power to explain subsequent lawsuits. In head-to-head comparisons of the 'informativeness' principal component with Standard & Poor's Transparency and Disclosure score, my informativeness measure is more effective than the S&P score in predicting the likelihood of a lawsuit. Finally, in cross-sectional tests, I find support for the theory that firms with good boards and managers who are not entrenched have better disclosure practices. Further, monitoring by institutional investors, independent boards and analysts appears to induce better corporate disclosure.