The Merits of Securities Litigation and Corporate Reputation

51 Pages Posted: 20 Sep 2023 Last revised: 8 Mar 2024

See all articles by Dain C. Donelson

Dain C. Donelson

University of Wisconsin - Madison - Department of Accounting and Information Systems

Antonis Kartapanis

Texas A&M University - Mays Business School

Christopher G. Yust

Texas A&M University

Date Written: September 1, 2023

Abstract

We explore how securities litigation affects corporate reputation. Experts remain concerned that nonmeritorious securities class actions - those that will be dismissed or settled for nuisance amounts - cause reputational damage. Although several prior studies show reputational costs for nonmeritorious cases, they generally use indirect measures based on returns or total market losses, which are mechanically associated with securities litigation elements. In contrast, we use a relatively direct reputation measure from Fortune’s “Most Admired Companies” list. We find significant reputational damage after meritorious litigation, with the strongest cases having the largest effects. However, we find no evidence of reputational damage after nonmeritorious litigation. We also find that Fortune’s reputational damage measure is associated with more negative returns around the litigation filing date. We show possible mechanisms for our results, as initial legal filings contain information allowing market participants to assess case merits. Our results imply that reputational damage is primarily due to fraud, which securities litigation helps reveal to the market, rather than litigation itself. Thus, reputational damage is not an issue in over 70% of securities class actions due to the high frequency of nonmeritorious cases.

Keywords: Reputation, Fraud, Securities Class Actions, Litigation

JEL Classification: D82, G30, H26, K22, K41, M41

Suggested Citation

Donelson, Dain C. and Kartapanis, Antonis and Yust, Christopher, The Merits of Securities Litigation and Corporate Reputation (September 1, 2023). Contemporary Accounting Research, 41 (1), Spring 2024, Available at SSRN: https://ssrn.com/abstract=4544022 or http://dx.doi.org/10.2139/ssrn.4544022

Dain C. Donelson

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Antonis Kartapanis

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Christopher Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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