Any event that wiped out $684 billion in shareholder wealth would be described by economists as disastrous. Congress would immediately order hearings, dragging the offending parties before the TV cameras and rushing to offer legislation to rectify the problem.
PRI’s Dr. Lawrence McQuillan examined prior economic “event studies” and determined that the median loss of market value due to a lawsuit was $3.86 million (in 2006 dollars). He then estimated that approximately 177,000 tort cases are filed against publicly traded companies in a given year – generating a yearly loss of $684 billion in shareholder wealth.
With the lawsuit industry booming, that might actually be a conservative estimate. Recent blockbuster cases – such as the litigation threat following Merck’s decision to pull Vioxx – wiped out $25 billion in shareholder value in a single day.
Of course, trial lawyers want us to think that only CEOs and Wall Street tycoons feel the heat from litigation-induced stock plunges. But the most recent figures from the Investment Company Institute tell us that nearly 55 million Americans own mutual funds – 60 percent of which earn less than $100,000 per year. Today, over 50 percent of Americans own stock, compared to just 17 percent in 1980.
The democratization of the equity markets over the past 25 years has extended stock ownership well onto Main Street – from families saving for their children’s education in popular 529 plans to middle class workers socking away retirement funds in their IRAs and 401Ks. Maybe Congress should order hearings after all – and make personal injury lawyers answer for abusing our legal system to pick the pockets of America’s investor class.