At a November 2020 webinar, attorneys, economists and academics discussed the role and application of economic analysis in European shareholder group actions.
|Economic analysis is key to addressing a number of important legal questions.
While the legal requirements related to shareholder group actions differ across jurisdictions, economic analysis plays a central role in a number of significant issues:
A carefully conducted event study is the sine qua non of the economic analysis in a shareholder group action.
Event studies often provide the foundation for the economic analysis in shareholder group actions. However, event studies are not purely mechanical exercises, and require careful judgement and analytical rigour. For example, the economist must exercise care in selecting market and industry indices and in determining the period over which the relationship between these indices and the company’s share price is estimated.
An event study is just the beginning.
An event study typically allows for the company-specific portion of share price movements to be isolated. Then, further analysis is required to determine how much, if any, of such movements are attributable to the allegations. These analyses may include evaluating such questions as:
|The impact on the share price of a given disclosure would not necessarily have been the same if that disclosure were made at an earlier point in time.
‘Back-casting’ share price movements from alleged corrective disclosures relies on several implicit assumptions:
Proprietary trading models can be used to estimate the potential magnitude of the damages that might be claimed.
Aggregate damages depend on the number of shares damaged. In circumstances without data on actual trading by investors (e.g. in the pre-action stage), proprietary trading models can be used to approximate trading behaviour and to estimate the number of shares damaged. These estimates are critical in assessing the magnitude of potential claims at an early stage. In addition, they are often useful in determining aggregate exposure for potential settlement negotiations.
The views expressed herein do not necessarily represent the views of Cornerstone Research.