The Shareholder Wealth Effects of Delaware Corporate Litigation

American Law and Economics Review, 19(2), 287-326, 2017

43 Pages Posted: 15 Jul 2012 Last revised: 8 Jan 2019

See all articles by Adam B. Badawi

Adam B. Badawi

University of California, Berkeley - School of Law

Daniel L. Chen

Directeur de Recherche, Centre National de la Recherche Scientifique, Toulouse School of Economics, Institute for Advanced Study in Toulouse, University of Toulouse Capitole, Toulouse, France

Date Written: January 31, 2017

Abstract

We collect data on the record of every action in hundreds of derivative cases and merger class actions involving public companies filed in the Delaware Court of Chancery from 2004 to 2011. We use these data to analyze how markets respond to litigation in the most important court for corporate disputes in the United States. The detail in the dataset allows us to explore how case characteristics such as the timing of the filing, the presence of certain procedural motions, litigation intensity, and the judge assigned to the case relate to firm value. Unlike previous studies, we document that negative abnormal returns are associated with the filing of derivative cases, and we show that this association is particularly strong for cases that are first filed in Delaware and are not related to a previously disclosed government investigation. We also develop some evidence that market participants can anticipate litigation intensity and respond by valuing the firm equity less and that markets associate cases with pension fund plaintiffs with better outcomes than cases without this institutional involvement. Finally, we find little evidence of abnormal returns associated with judicial assignment at the time of filing for derivative cases, but we do observe an association be- tween judicial assignment and case filing for merger cases.

Keywords: Corporate law, litigation event studies, Delaware courts

JEL Classification: G14, K41

Suggested Citation

Badawi, Adam B. and Chen, Daniel L., The Shareholder Wealth Effects of Delaware Corporate Litigation (January 31, 2017). American Law and Economics Review, 19(2), 287-326, 2017. Available at SSRN: https://ssrn.com/abstract=2108357 or http://dx.doi.org/10.2139/ssrn.2108357

Adam B. Badawi (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Daniel L. Chen

Directeur de Recherche, Centre National de la Recherche Scientifique, Toulouse School of Economics, Institute for Advanced Study in Toulouse, University of Toulouse Capitole, Toulouse, France ( email )

21 allée de Brienne
31015 Toulouse cedex 6 France
Toulouse, 31015
France

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