Mind the Contagion, Your Honour

Abstract

Although court judgments on economic issues are frequent, their impact remains understudied. Unlike laws, studied extensively by law and finance literature, they are not publicly debated, not passed by legislators, and do not always factor in economic implications. Studying an unexpected verdict of the Indian Supreme Court that retrospectively canceled the allocation of coal blocks, we find evidence of contagion through what we call a litigation channel: firms unconnected with the judgment but facing litigation experience a credit supply shock and a decline in investments. The shock is distinct from the known bank lending channel and has significant macro-economic consequences.

Keywords: Litigation Risk, Bank lending channel, Contagion, Firm Performance

JEL Classification: G21,L25, K00