Incidence, Disclosure, and Risk of Corporate Litigation: Insights from Federal Court Filings

Abstract

We collect a sample of 178,334 lawsuits filed against 222,913 lawsuit-defendants (representing 5,533 unique public companies) in federal district court from 2006 through 2021. These lawsuits involve an array of allegations, including product liability, civil rights discrimination, cybersecurity breaches, improper compensation and labor practices, antitrust violations, corruption, securities violations, pollution, and intellectual property infringement. Less than 0.6% of these cases stem from securities class action claims. The remaining cases exhibit rich variation in legal exposure across firms, industries, and time that reflects firm activities as well as social, political, and regulatory trends. Our findings indicate that materiality, public and private enforcement, the richness of firms’ information environments (including the desire to control the narrative surrounding the lawsuit), and firm characteristics factor into managers’ decisions to disclose these claims. Subsequent tests link aggregate legal exposure to return volatility, suggesting value in taking a holistic view when considering how litigation shapes firms’ risk. Collectively, our findings establish the foundation to further study the adequacy and strategic nature of the disclosure of contingent liabilities, and to explore alleged corporate misbehavior in myriad present-day contexts. In so doing, they highlight the importance of taking a context-specific view when assessing legal exposure.

Keywords: disclosure, contingent liabilities, corporate litigation, securities litigation, litigation risk

JEL Classification: M41, K22, G14