The Supreme Court's Impact on Securities Class Actions: An Empirical Assessment of Tellabs

How does Supreme Court precedent affect lower court decisions when there is asymmetric probability of appellate review? We study the impact of Tellabs, Inc. v. Makor Issues & Rights, Ltd., which clarified the law of securities fraud on pleading scienter. Tellabs reversed a lenient "reasonableness" standard for pleading scienter but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Would the Supreme Court's directive cause the dismissal rates in the lower courts to converge? We find that Tellabs correlates with a significantly lower dismissal rate on scienter grounds in circuits previously applying a higher preponderance standard for scienter. In contrast, we find no significant shift in the courts previously applying the lower reasonableness standard in our basic model. Overall, we conclude that Tellabs led to increased uniformity in how lower courts apply pleading standards, but its effect is muted by the asymmetry of the right to appeal. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.