Shareholders' Perception of the Securities Litigation Regime in the U.S.: Stock Price Impact of the Presidential Veto of the Private Securities Litigation Reform Bill of 1995

On December 19, 1995, President Clinton vetoed the Private Securities Litigation Reform Bill because he disapproved of certain provisions in the bill, which restrict the ability of private litigants to sue for securities fraud. This study shows that the stock price reaction to the veto is positively correlated with proxies for probability of a firm being sued, namely, market model beta and membership in high technology industries. It further shows that the stock price reaction to the veto reverses when Congress overrides the veto. This evidence suggests that the shareholders of firms with high litigation risk approved of the veto. We consider several reasons for the stock price reaction to the veto and conclude the following: the shareholders' primary concern was that the restrictions to sue proposed in the bill would reduce the deterrence effect of securities litigation and weaken the financial disclosure system.