Securities Class Action Involving Corporate Bond Event Studies

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Cornerstone Research supported a finance expert to rebut claims that a company’s bond prices were artificially inflated.

Counsel representing former executives of a publicly traded company retained Cornerstone Research and Professor René Stulz of The Ohio State University to analyze loss causation and damages in a Section 10(b) securities class action. The case posed unique challenges because the class included purchasers of eight corporate bonds that traded infrequently during the class period, in addition to purchasers of company stock.

The plaintiffs alleged that the prices of the eight bonds were artificially inflated by misrepresentations related to the company’s forward guidance, violations of generally accepted accounting principles (GAAP) in financial statements, and misrepresentations related to the adequacy of the company’s internal controls.

Professor Stulz performed an alternative bond event study using actual transaction prices.

The plaintiffs’ expert proposed a bond event study to estimate the unexplained portion of bond price declines on the alleged corrective disclosure days, which the expert used to calculate bond price inflation. The expert based the study on matrix prices—proprietary model prices estimated by a data service—to compute daily bond returns, even though many of the bonds at issue did not trade around the alleged corrective disclosure days.

Professor Stulz performed an alternative event study using actual transaction prices, and followed an established methodology for analyzing bond returns in the context of infrequent trading. Among other findings, he opined that the plaintiffs’ expert mistakenly concluded that all eight bonds had statistically significant price movements on the alleged corrective disclosure days. In fact, when the analysis was performed using transaction prices, few of the bonds had statistically significant price movements around those days. The case settled just prior to the filing of motions for summary judgment.


For additional information about this case, please contact Dan Garrett.

Case Expert

René M. Stulz

Everett D. Reese Chair of Banking and Monetary Economics,
Director, Dice Center for Research in Financial Economics,
Fisher College of Business,
The Ohio State University