Download This PaperCompetition and the Reputational Costs of Litigation
University of St.Gallen, School of Finance Research Paper No. 2020/07
Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC
60 Pages Posted: 11 Dec 2020 Last revised: 21 Nov 2022
Date Written: November 1, 2022
Abstract
We study the role of competition in customers' reactions to litigation against firms, using anonymized mobile phone location data. A class action lawsuit filing results in a 4% average reduction in customer visits to target firms' outlets in the following months. The effect strongly depends on competition. Outlets facing more competition experience significantly larger negative effects. Closer competition matters more, both in terms of geographic and industry proximity. Announcement returns and quarterly accounting revenues around lawsuit filings also strongly depend on competition. Our results suggest that competition is an important component in customers' ability to discipline firms for misbehavior.
Keywords: class action lawsuits, corporate misbehavior, competition, reputational costs
JEL Classification: D12, D43, G14, G30, K42
Suggested Citation: Suggested Citation
Swiss Finance Institute ( email )
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
Markus Schmid
University of St. Gallen - Swiss Institute of Banking and Finance ( email )
Unterer Graben 21
St. Gallen, 9000
Switzerland
University of St. Gallen - School of Finance ( email )
Unterer Graben 21
St.Gallen, CH-9000
Switzerland
Swiss Finance Institute
c/o University of St. Gallen
Dufourstrassse 50
St. Gallen, SG 9000
Switzerland