Measuring Securities Litigation Risk
59 Pages Posted: 1 Jul 2010 Last revised: 29 Dec 2012
Date Written: September 1, 2011
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.
Keywords: Litigation risk, Securities litigation, Corporate disclosure
JEL Classification: K22, K41, M41
Suggested Citation: Suggested Citation