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Securities class-action lawsuits have become more highly contentious as of late. Plaintiff's attorneys claim they keep Wall Street accountable. Business executives complain that suits are lining lawyer's pockets to the detriment of shareholders. Financial services firms are being waylaid by lawsuits as stock and fund prices have dropped, owing to subprime-related investment activity. This paper reveals that investors penalize firms even before the announcement of a securities class-action lawsuit against those same firms. Investors in fact rationally anticipate an event, for example, the recent Fidelity Investments lawsuit or a poor earnings announcement by a firm, based on industry conditions and firm-specific factors.
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