Corporate Litigation and Debt

43 Pages Posted: 6 Dec 2017

Date Written: September 1, 2017

Abstract

This study examines the effect of litigation risk and litigation costs on firms’ credit ratings and debt financing. The results show that litigation affects a firm’s creditworthiness and debt costs in two stages. Before a lawsuit filing, firms at higher risk of litigation have lower credit ratings, are more likely to be rated speculative grade, pay higher yields on loans and bonds, and are less likely to rely on debt financing. At the time of the lawsuit resolution, settlement costs have an additional effect on firm credit quality. Companies facing larger settlement disbursements in relation to their available cash experience a decline in credit ratings and an increase in yield spread. The results are robust to endogeneity concerns and different proxies of litigation risk.

Keywords: Corporate Debt, Credit Ratings, Cost of Debt, Litigation, Lawsuits

JEL Classification: G32, G24, K22, K41

Suggested Citation

Arena, Matteo P., Corporate Litigation and Debt (September 1, 2017). Journal of Banking and Finance, Vol. 87, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3078812

Matteo P. Arena (Contact Author)

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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