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Shareholder Monitoring and Securities Class Action Lawsuits

We identify a group of investors with a track-record of owning firms that undergo securities class action lawsuits. We hypothesize and find evidence that these investors are ineffective monitors of corporate management. Firms with a large proportion of these shareholders are at greater risk of future litigation at both the intensive and extensive margins. Moreover, they suffer poor acquisition returns and have entrenched managers. These litigation-prone investors are troubled by heightened operational risk and have been investigated for securities fraud, which may potentially explain their inability to provide effective monitoring.