An interesting academic study (via The D&O Diary) released in February 2012 uses years of data about securities class actions and hierarchical Bayesian models to attempt to predict something that is of tremendous interest and value to public companies and their executives, D&O insurance providers, and class action lawyers of all stripes: the incidence and amount of settlements for federal securities class action lawsuits.

The study is the work of Northwestern University Kellogg School of Management Professor Blakeley McShane, Juridigm Principal and Vice President Oliver Watson, University of Pennsylvania Law Professor Tom Baker and Fordham University Law Professor Sean Griffith. It uses statistical analysis to identify the most important predictors of settlement incidence and settlement amount. Notably, the study only uses variables whose values can be calculated on the day the lawsuit is filed, allowing for very early predictions to be made.

According to the results of the study, factors that indicate a case will most likely settle include:

a greater number of classes or types of securities associated with the case; 

a higher return on the S&P 500 during the class period; 

whether or not GAAP violations were alleged; and 

the existence of an individual plaintiff. 

Factors that indicate a case is less likely to settle include:

longer filing times;

higher market capitalization;

a higher company return during the class period;

the existence of an institutional plaintiff; and 

greater public notoriety (as measured by the number of Google hits in the year prior to filing).

With respect to settlement amount, the study found that factors positively impacting the settlement amount include:

a greater number of classes or types of securities associated with the case;

the length of the class period; 

the company's market capitalization;

the company return during the class period; 

restated earnings; 

alleged violations of Section 11 of the Securities Act;

alleged insider trading; 

the existence of an institutional plaintiff; and 

the number of Google hits. 

Factors associated with lower settlements amounts included longer filing times and the absence of an institutional investor as a plaintiff.

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