Corporations pay out large settlements to their shareholders and other plaintiffs as compensation for corporate governance failures. Hired to achieve and improve settlements, plaintiff law firms can play a central role in litigation outcomes. We provide first systematic evidence of their performance.
In our novel comprehensive dataset, top plaintiff law firms (“stars”) capture 48% larger settlements. Defendant corporations’ litigation insurance coverage is also 39% larger, suggesting assortative matching of stars with lawsuits that have ex-ante large expected payoffs. Stars’ visibility and information advantage vis-à-vis less sophisticated plaintiffs help sustain their market share.
We analyze class action litigation as a corporate governance device. Firms that have lower internal governance standards and those with fewer external...