The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy
37 Pages Posted: 17 Mar 2010 Last revised: 11 Dec 2012
Date Written: December 4, 2012
Abstract
The risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlements and other related costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. The market value of cash is significantly lower for firms exposed to litigation risk. Corporate investment decisions are also affected by litigation risk, as firms reduce capital expenditures in response. Our results are robust to endogeneity concerns and possible spurious temporal effects.
Keywords: Cash Holdings, Litigation Risk, Risk Management; Corporate Investment
JEL Classification: G31, G32
Suggested Citation: Suggested Citation
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