Mind the Contagion, Your Honour
52 Pages Posted: 12 Jun 2020 Last revised: 24 Nov 2020
Date Written: May 1, 2020
Although court judgments on economic issues are frequent, their impact remains understudied. Unlike laws, studied extensively by law and finance literature, they are not publicly debated, not passed by legislators, and do not always factor in economic implications. Studying an unexpected verdict of the Indian Supreme Court that retrospectively canceled the allocation of coal blocks, we find evidence of contagion through what we call a litigation channel: firms unconnected with the judgment but facing litigation experience a credit supply shock and a decline in investments. The shock is distinct from the known bank lending channel and has significant macro-economic consequences.
Keywords: Litigation Risk, Bank lending channel, Contagion, Firm Performance
JEL Classification: G21,L25, K00
Suggested Citation: Suggested Citation