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

60 Pages Posted: 11 Sep 2018

See all articles by Benjamin Bennett

Benjamin Bennett

Ohio State University (OSU) - Department of Finance

Todd T. Milbourn

Washington University in Saint Louis - Olin Business School

Zexi Wang

University of Bern

Date Written: September 11, 2018

Abstract

We study the effect of legal risk on firms’ investment. Using legal risk measures based on the number of litigious words in SEC 10-K filings, we find legal risk reduces investment. Underlying mechanisms include both i) a financing channel, whereby legal risk reduces credit ratings, increases bank loan costs, and decreases borrowing, and ii) an attention channel, whereby legal risk consumes top-management’s attention. Accordingly, we find legal risk has negative effects on firms’ investment efficiency and stock performance. We address endogeneity concerns through a DiD analysis utilizing staggered adoptions of universal demand laws across states.

Keywords: Legal risk, Investment, SEC 10-K filing

JEL Classification: G30, G31, K20

Suggested Citation

Bennett, Benjamin and Milbourn, Todd T. and Wang, Zexi, Corporate Investment Under the Cloud of Litigation (September 11, 2018). Fisher College of Business Working Paper No. 2018-03-18. Available at SSRN: https://ssrn.com/abstract=3247688 or http://dx.doi.org/10.2139/ssrn.3247688

Benjamin Bennett (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/site/benjaminbennettfinance/

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

University of Bern ( email )

Engehaldenstrasse 4
Bern, CH-3012
Switzerland

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