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Single-Firm Event Studies, Securities Fraud, and Financial Crisis: Problems of Inference
Stanford Law Review (2016)
  • Andrew Baker, Stanford University
Lawsuits brought pursuant to section 10(b) of the Securities and Exchange Act
depend on the reliability of a statistical tool called an event study to adjudicate issues of
reliance, materiality, loss causation, and damages. Although judicial acceptance of the
event study technique is pervasive, there has been little empirical analysis of the ability of
event studies to produce reliable results when applied to a single company’s security.

Using data from the recent financial crisis, this Note demonstrates that the standardmodel
event study used in most court proceedings can lead to biased inferences sanctioned
through the Daubert standard of admissibility for expert testimony. In particular, in the
presence of broad market volatility, a base event study will cause too many returns to be
identified as statistically significant. Even recently proposed variations of the event study
model specifically designed to address violations of the statistical assumptions of an event
study will not completely correct this bias. This Note proposes two alternative forms of
event studies that are capable of creating statistically reliable results and should be adopted
by courts in instances where there is cause to believe that market volatility has increased.

Over previous decades, the judiciary has steadily moved toward a reliance on empirics and
expert testimony in overseeing complex civil cases. Yet there has been surprisingly little
research accompanying this judicial deference on the ability of statistical evidence to
produce the promised result. This Note calls into question whether this movement has
been beneficial from a logical or empirical perspective, but it demonstrates that alternative
techniques that can aid the finder of fact in resolving these disputes—regardless of market
trends—may in fact exist.
  • Event Studies,
  • Securities Litigation
Publication Date
Spring May, 2016
Citation Information
Andrew Baker. "Single-Firm Event Studies, Securities Fraud, and Financial Crisis: Problems of Inference" Stanford Law Review Vol. 68 Iss. 5 (2016) p. 1207 - 1261
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