The Effect of Securities Litigation on External Financing

45 Pages Posted: 8 Jul 2013 Last revised: 9 May 2015

See all articles by Don M. Autore

Don M. Autore

Florida State University - College of Business

Irena Hutton

Florida State University - College of Business

David R. Peterson

Florida State University - Department of Finance

Aimee Hoffmann Smith

Boston College; Bentley University - Department of Finance

Date Written: May 13, 2014

Abstract

Using a comprehensive sample of securities litigation, we examine the effect of financial fraud on the subsequent use of external financing. We find that firms with a recent history of securities litigation, particularly more severe litigation, are less likely to seek external debt and equity financing. This negative relationship between prior litigation and external financing is stronger for firms with high information asymmetry. Furthermore, firms significantly reduce their investments in capital expenditures and research and development during the three years following a litigation filing. Thus, the reduction in the availability of external financing due to allegations of financial fraud can have a tangible impact upon the investment opportunities of the firm.

Keywords: Securities Litigation, External Financing, Information Asymmetry, Investment

JEL Classification: K22, G32

Suggested Citation

Autore, Don M. and Hutton, Irena and Peterson, David R. and Smith, Aimee Hoffmann, The Effect of Securities Litigation on External Financing (May 13, 2014). Journal of Corporate Finance, Vol. 27, 2014, Available at SSRN: https://ssrn.com/abstract=2290830 or http://dx.doi.org/10.2139/ssrn.2290830

Don M. Autore

Florida State University - College of Business ( email )

821 ACADEMIC WAY, Room 314 RBA
P.O. Box 3061110
Tallahassee, FL 32306-1110
United States
850-644-7857 (Phone)

Irena Hutton

Florida State University - College of Business ( email )

821 Academic Way
Tallahassee, FL 32306-1110
United States
850.645.1520 (Phone)

David R. Peterson

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)

Aimee Hoffmann Smith (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

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