Index Funds and Securities Fraud Litigation

Most legal scholars agree that securities fraud class actions do little to compensate investors. Most investors are well diversified and, thus, are just as likely to sell an overpriced stock as to buy one. Moreover, since the defendant company ultimately pays in a successful class action, holders effectively pay buyers. Although this circularity is widely recognized, few have noted that because of the anticipated payout, the prospect of a class action causes stock price to decline by more t...