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Center for Law, Economics and Public Policy
Research Paper No. 316
ECGI
Yale Law School
Law Working Paper Series
Working Paper No. 44/2005
Empirical Studies of Corporate Law
May 2005
International Center for Finance (ICF)
Working Paper No. 05-16
Sanjai Bhagat
Roberta Romano
Yale University
1
Empirical Studies of Corporate Law
Sanjai Bhagat
Professor of Finance, University of Colorado at Boulder
and
Roberta Romano
Oscar M. Ruebhausen Professor of Law, Yale University
for “Handbook of Law and Economics”
edited by A. Mitchell Polinsky and Steven Shavell
May 2005
Sanjai.Bhagat@Colorado.edu Roberta.Romano@Yale.edu
2
Empirical Studies of Corporate Law
Abstract
This chapter reviews the empirical literature, especially the event study literature, as it relates to
corporate and securities law. Event studies are among the most successful uses of econometrics in policy
analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology
offers a fruitful means for evaluating the welfare implications of private and government actions.
T his
chapter begins by briefly reviewing the event study methodology and its strengths and limitations for
policy analysis. It then discusses one of the limitations of more conventional empirical work (cross-
sectional analysis), the problem presented by the fact that the characteristics of firms that are studied in
relation to each other (such as ownership and mechanisms of corporate governance) or to firm
performance are not exogeneous but self-selected by firms. Thereafter it reviews in detail how event
studies have been used to evaluate the wealth effects of corporate litigation.
T Subsequently, w
Te focus on
the methodology’s application to corporate law and corporate gover