Securities Litigation Environments and Bank Lending: Evidence From the Courts
52 Pages Posted: 30 Sep 2018
Date Written: September 10, 2018
We use bank loans transacted from 2001 to 2013 and examine how heterogeneous pleading standards in U.S. federal district courts affect bank lending decisions. We find robust evidence that firms headquartered in district court jurisdictions that dismiss more securities lawsuits pay significantly lower interest rates. The effect is stronger when borrowers have less information asymmetry issues and diminishes after the Supreme Court’s Tellabs decision that homogenizes court pleading standards. Our results suggest lenders consider the benefit of high pleading standard in curtailing frivolous lawsuits to outweigh the cost of financial misreporting incentives. Our findings remain robust to court fixed effects.
Keywords: Litigation Environments, Securities Class Action Lawsuits, Financial Reporting Incentive, Bank Lending, Law and Finance
JEL Classification: G21, K22, K42, M41
Suggested Citation: Suggested Citation