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This article examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with our predictions, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and abnormal insider selling after the PSLRA. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements.
Johnson et al. (2006) studied this question.