Empirical Legal Studies – A Discussion on an Expanding Approach to Research
12.07.2010
The subject of empirical legal studies falls under the legal field of law & economics. As part of this new approach to research, statistical analyses are carried out and econometric models created to assist in testing the quality of regulations and developing theories on legal reality to provide the most objective estimate of the legal environment possible.In this context, Holger Fleischer invited Professor Jonathan Klick of the University of Pennsylvania to present a seminar on econometrics, held in the Institute on 30 June and 1 July 2010. The seminar provided participants with insight into the preparation of empirical studies for legal questions and helped them to gain a better understanding of this aspect of law & economics. Professor Klick covered the whole spectrum of inquiry from the fundamental principles of statistics through to complex empirical studies of specific commercial law regulations. He illustrated his presentation with a range of examples, making it easier for his audience as the analysis at hand often poses challenges for lawyers unfamiliar with the methodology.
To begin with, Professor Klick provided a short overview of the development of the law & economics area, explaining how, since about the mid-1990s, empirical analysis has been steadily gaining in importance for US legal research. Since then it has come to play a significant role in all larger law schools.
Descriptive Analysis and Inferential Analysis
Professor Klick differentiated between descriptive analysis and inferential analysis in his presentation. The first involves describing specific legal phenomena, such as the differences between different legal systems. Statistical analysis provides some assistance in this context to organise and categorise information, and provide more objective results than mere “anecdotal” evidence. Inferential analysis compliments this process using tests and statistical measuring processes to develop theories on legal effectiveness and to evaluate the legal situation.
Legal Reality Models
In addition, Professor Klick provided a short introduction to the fundamentals of statistics and explained terms and concepts such as mean, median and standard deviation, normal distribution and the law of large numbers and the central limit theorem. This was followed by an introduction to regression analysis, which, together with recorded data can be used to develop legal reality models. The participants looked at different models as well as the problems which may arise from statistical analysis, for example, the omitted variables bias and the monitoring of a model with regard to variables that are more difficult to quantify (e.g. aspirations and expectations). Often it is more important to find a suitable control group which, where possible, will only differ from the focus group in the particular areas being investigated. Depending on the subject and goal of analysis, a range of data sets can be applied, e.g. cross sectional data sets, time series data sets and panel data sets.
The Four Stages of the Event Study
For empirical studies in financial law the event study plays a particularly important role. As a result of the theoretical financial concepts involved, e.g. efficiency hypotheses and the capital asset pricing model (CAPM), the problem of significant variables being falsely left out of consideration can be overcome. This makes carrying out empirical studies significantly easier. However, one should not lose sight of the fact that concepts such as market efficiency and CAPM as well as their prerequisites are not (in part due to the financial crisis) undisputed. An event study normally consists of four stages: 1) identification of an event (ascertaining the important aspect of just when the event occurred can be quite difficult, as exemplified by a ‘sneaking’ appearance such as slow transfer of information to the market); 2) the development of a counterfactual model (to define what could be expected if the specific event had not happened); 3) ascertainment of abnormal profits, i.e. those deviating from the normal level); 4) establishing whether this abnormal profit is statistically significant and not merely a coincidence. Important sources of financial information for carrying out event studies are (particularly in the USA) the Center for Research in Security Prices (CRSP) and the Wharton Research Data Service (WRDS).
The seminar ended with an overview of the various law & economics journals and their significance as well as an overview of further activities in the field of empirical analysis.