The Effect of Investor Attention on Fraud Discovery and Value Loss in Securities Class Action Litigation

Abstract

We examine the effect of investor attention on value loss due to securities class action lawsuits and fraud discovery. We find that investor attention is positively associated with damage to corporate reputation and the magnitude of value losses suffered by the defendant firm. The reputational damages to the defendant firms with higher investor attention are evident from poor operational performance and lower institutional ownership post-filing. Investor attention is positively associated with the diffusion of information regarding fraud and also accelerates lawsuit filing. The effects of investor attention, however, are not subsumed by the severity of the fraud. Our results are robust to a battery of tests that addresses selection and endogeneity concerns.