Competition 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
92 Pages Posted: 11 Dec 2020 Last revised: 21 Nov 2022
Date Written: September 06, 2024
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 is followed by 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: JEL classification: D12, D43, G14, G30, K42 class action lawsuits, corporate misbehavior, competition, reputational costs
JEL Classification: D12, D43, G14, G30, K42
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