Much of the research in law and finance reduces complex texts down to a handful of variables. Legal scholars have voiced concerns that this dimensionality reduction loses important detail that is embedded in legal text. This article assesses this critique by asking whether text analysis can capture meaningful predictive information. It does so by applying text analysis and machine learning to a corpus of private securities class action complaints that contains over 90 million words. This analysis produces three primary findings: (1) the best performing models predict outcomes with an accuracy rate of about 70%, which is higher than baseline rates; (2) a hybrid model that uses both text and nontext components performs better than either of these two components alone; and (3) the predictions made by the machine learning models are associated with substantial abnormal returns in the days after cases get filed (JEL G10, G14).
Recent research on corporate litigation has focused on three trends: the growth in percentage of mergers that result in litigation, the migration of cases away from Delaware, and the increasing prevalence of merger litigation occurring simultaneously in multiple jurisdictions. This Article uses a new and unique dataset of public company litigation to track how these trends have affected filings and litigation tactics in the Delaware Court of Chancery from 2004 to 2011. The data confirm that Delaware appears to have experienced a decline in filings during the early and middle periods of the sample, but the data also shows that there has been a sharp increase in the number of the number of acqusition-related cases filed in Delaware in 2010 and 2011. The rise of concurrent, multi-jurisdictional litigation and the litigation tactics that it encourages are the likely reasons for the growth of acquisition-related cases in Delaware. While some plaintiffs' attorneys may have left Delaware to escape the Chancery's threats of lower attorneys' fees and merit-based selection of lead counsel, in the current environment a Delaware filing may provide strategic advantages as foreign jurisdictions become saturated with filings. For example, lawyers may try to take control of a case by moving for expedited proceedings in Delaware or they may try to complicate negotations over the selection of lead plaintiffs' counsel. The threat of using these tactics may increase the possibility that a plaintiff will receive some share of a fee award either in Delaware or in a case being litigated elsewhere. This Article explores how the rules Delaware uses to manage deal cases may enable strategic behavior in the context of multi-jurisdictional
A substantial body of theoretical, qualitative, and experimental research has investigated whether reliance on legal threats “crowds out” informal, norm‐based ways of regulating behavior or, instead, whether the ability to enforce law formally enhances the ability of private parties to use these informal approaches. There has, however, been little quantitative, real‐world work that looks into this question. This article begins this process through a study of how franchisors regulate the incentives that their franchisees have to cut corners on the brand's quality and uniformity standards. One solution to this problem is to threaten to pursue a breach of contract action for violation of these standards, which allows the franchisor to obtain a damage award against a franchisee. Alternatively, a franchisor can rely on more informal means, such as awarding an extra franchise outlet to those franchisees who behave well. There is a tradeoff between these two mechanisms; the informal rewards are costly to provide, but easy to enforce, while contractual threats are cheap, but their enforcement is expensive. Moreover, the literature on relational governance suggests that the use of formal legal threats may undermine an agent's willingness to abide by reciprocation norms along noncontractible dimensions. These theories suggest that formal and informal mechanisms will act as substitutes and this study, which uses a newly collected data set of franchise agreements, provides strong evidence for that assertion. The analytical insight that permits this inference is the presence of liquidated damages provisions as an indicator of the willingness to use formal law. Courts have shown hostility to the use of the default rule of expectation damages, but they will enforce liquidated damages terms, which means that these provisions are a credible threat to use formal legal sanctions. This study finds that a limited number of franchisors use these terms and that their presence correlates negatively and significantly with variables that are associated with informal, nonlegal means of incentivizing franchisees.
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