Competition and the Reputational Costs of Litigation

60 Pages Posted: 11 Dec 2020 Last revised: 9 May 2022

See all articles by Felix von Meyerinck

Felix von Meyerinck

Tilburg University - Tilburg University School of Economics and Management

Vesa Pursiainen

University of St. Gallen; Swiss Finance Institute

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance; Swiss Finance Institute

Date Written: April 29, 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

von Meyerinck, Felix and Pursiainen, Vesa and Schmid, Markus, Competition and the Reputational Costs of Litigation (April 29, 2022). University of St.Gallen, School of Finance Research Paper No. 2020/07 , Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3744414 or http://dx.doi.org/10.2139/ssrn.3744414

Felix Von Meyerinck

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Vesa Pursiainen (Contact Author)

University of St. Gallen ( email )

Swiss Institute of Banking and Finance
Unterer Graben 21
St.Gallen, 9000
Switzerland

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

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