Corporate Investment Under the Cloud of Litigation

Fisher College of Business Working Paper No. 2018-03-18

Charles A. Dice Center Working Paper No. 2018-18

50 Pages Posted: 11 Sep 2018 Last revised: 7 Dec 2023

See all articles by Benjamin Bennett

Benjamin Bennett

Tulane University - A.B. Freeman School of Business

Charles (Chad) Ham

Indiana University - Kelley School of Business

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Zexi Wang

Lancaster University

Date Written: December 5, 2023

Abstract

Firms face various litigation threats from investors, customers, and regulators. We propose an intuitive measure for the firm’s overall litigation risk by parsing 10-K reports, which demonstrates strong predictability for future lawsuits after controlling for firm characteristics, existing lawsuits and federal judge ideology. We study the sensitivity of corporate investment to this litigation risk measure. We find litigation risk reduces overall investment levels, but improves investment efficiency primarily by reigning in overinvestment. Using a regulation shock to the ninth district court ruling in 2007, we show that shareholder litigation risk plays an important role in the litigation sensitivity of investment.

Keywords: Legal risk, Investment efficiency, Over-investment

JEL Classification: G30, G31, K20

Suggested Citation

Bennett, Benjamin and Ham, Charles and Milbourn, Todd T. and Wang, Zexi, Corporate Investment Under the Cloud of Litigation (December 5, 2023). Fisher College of Business Working Paper No. 2018-03-18, Charles A. Dice Center Working Paper No. 2018-18, Available at SSRN: https://ssrn.com/abstract=3247688 or http://dx.doi.org/10.2139/ssrn.3247688

Benjamin Bennett (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

HOME PAGE: https://sites.google.com/site/benjaminbennettfinance/home

Charles Ham

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School ( email )

1 Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/

Zexi Wang

Lancaster University ( email )

Lancaster University Management School
Bailrigg
Lancaster, LA1 4YX
United Kingdom

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