Institutional Activism Through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions

The PSLRA's lead plaintiff provision enlisted institutional investors to monitor class counsel in order to curb the agency costs endemic in securities class actions. This article uses a sample of 731 settlements to examine the efficacy of this provision. It finds that, even when controlling for institutional self-selection of potentially easier or higher-quality cases, cases with public pension lead plaintiffs have larger recoveries and lower fee requests and fee awards than cases with other lead plaintiff types. The article also finds evidence consistent with the existence of a significant positive externality associated with public pension participation. Over time, fee requests and fee awards have on average declined significantly even in cases without such lead plaintiffs. These findings suggest that public pensions act as more effective monitors of class counsel than traditional plaintiffs and that the lead plaintiff provision has substantially reduced the transactions costs associated with securities class actions.