Corporate Investment Under the Cloud of Litigation
Fisher College of Business Working Paper No. 2018-03-18
Charles A. Dice Center Working Paper No. 2018-18
50 Pages Posted: 11 Sep 2018 Last revised: 7 Dec 2023
Date Written: December 5, 2023
Abstract
Firms face various litigation threats from investors, customers, and regulators. We propose an intuitive measure for the firm’s overall litigation risk by parsing 10-K reports, which demonstrates strong predictability for future lawsuits after controlling for firm characteristics, existing lawsuits and federal judge ideology. We study the sensitivity of corporate investment to this litigation risk measure. We find litigation risk reduces overall investment levels, but improves investment efficiency primarily by reigning in overinvestment. Using a regulation shock to the ninth district court ruling in 2007, we show that shareholder litigation risk plays an important role in the litigation sensitivity of investment.
Keywords: Legal risk, Investment efficiency, Over-investment
JEL Classification: G30, G31, K20
Suggested Citation: Suggested Citation