Measuring Securities Litigation Risk

Abstract:     
Extant research commonly uses indicator variables for industry membership to proxy for securities litigation risk. We provide evidence on the construct validity of this measure by reporting on the predictive ability of alternative models of litigation risk. While the industry measure alone does a relatively poor job of predicting litigation, supplementing this variable with measures of firm characteristics (such as size, growth, and stock volatility) considerably improves predictive ability. Additional variables such as those that proxy for corporate governance quality and managerial opportunism do not add much to predictive ability and so do not meet the cost-benefit test for inclusion.

Number of Pages in PDF File: 59

Keywords: Litigation risk, Securities litigation, Corporate disclosure

JEL Classification: K22, K41, M41

working papers series