Securities Litigation Environments and Bank Lending: Evidence From the Courts

52 Pages Posted: 30 Sep 2018

See all articles by Wei-Ling Song

Wei-Ling Song

Louisiana State University

Haitian Lu

Hong Kong Polytechnic University

Zhen Lei

Hong Kong Polytechnic University

Date Written: September 10, 2018

Abstract

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

Song, Wei-Ling and Lu, Haitian and Lei, Zhen, Securities Litigation Environments and Bank Lending: Evidence From the Courts (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=3246981 or http://dx.doi.org/10.2139/ssrn.3246981

Wei-Ling Song

Louisiana State University ( email )

Baton Rouge, LA 70803
United States
225-578-6258 (Phone)
225-578-6366 (Fax)

Haitian Lu (Contact Author)

Hong Kong Polytechnic University ( email )

School of Accounting and Finance
Hung Hom
Hong Kong

Zhen Lei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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