Review of Accounting Studies, 5, 217–233 (2000) c  2000 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands. Shareholder Wealth Effects of the Private Securities Litigation Reform Act of 1995 MARILYN F. JOHNSON johnsonm@umich.edu The Eli Broad College of Business, East Lansing, MI 48824 RON KASZNIK kasznik ron@gsb.stanford.edu Graduate School of Business, Stanford University, Stanford, CA 94305 KAREN K. NELSON knelson@gsb.stanford.edu Graduate School of Business, Stanford University, Stanford, CA 94305 Abstract. This paper investigates the reaction of stock prices to enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA). Based on a sample of 489 high-technology firms, we find that the PSLRA was wealth-increasing, on average, and that the market reaction is more positive for firms at greatest risk of being sued in a securities class action. However, we also show that the PSLRA was less beneficial for firms likely to be the subject of a meritorious lawsuit. Collectively, our evidence implies that shareholders generally benefit from restrictions on private securities litigation, although these benefits are mitigated when other mechanisms for curbing fraudulent activity are inadequate. Keywords: Securities litigation, litigation risk, regulatory event study In December 1995, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA), concluding a long, and often controversial, legislative effort to reform federal securities laws. Considered by some to be the most significant securities legislation in several decades, the PSLRA contains a wide variety of measures intended to protect pub- licly traded firms, their auditors, and other professional advisers from abusive class action litigation. The PSLRA also imposes new requirements regarding auditors’ responsibil- ity to detect and disclose fraud. Proponents of the PSLRA argued that it would ben- efit investors by curtailing frivolous shareholder lawsuits that require substantial corpo- rate resources to defend or settle. Opponents countered that it would increase the inci- dence of fraud by effectively preventing meritorious claims from being heard in federal courts. 1 The purpose of this study is to measure the effect of the PSLRA on firm value by investi- gating the reaction of common equity prices to its passage. Because key events late in the legislative process (i.e., a Presidential veto and subsequent Congressional override) were unexpected, our examination provides a relatively powerful test of the PSLRA’s economic consequences. This study is important given recent calls by the Securities and Exchange Commission (SEC) and others for measures that provide shareholders with greater pro- tection from financial reporting failures (e.g., AICPA, 1992, 1994; National Association of Corporate Directors, 1992; Levitt, 1998). The PSLRA’s impact on shareholder wealth