Firms faced with a class action lawsuit experience reputational and financial penalties.  However, research has focused solely on the consequences for the defendant and, to our knowledge, no studies have examined whether the repercussions of alleged malfeasance range beyond the company sued. Thus, it remains unexplored whether litigation risks extend beyond the sued firm and whether there are spillover risks associated with doing business with that firm.
Prior research has found that corporate culture, governance practices, and even bankruptcy risks extend beyond the traditional boundaries of firms that share directors or are linked with business partners through contracts. In … Read more
Litigation allows shareholders to seek remedies for fiduciary breaches by managers or directors, such as when there has been a misrepresentation of financial results or illegal insider trading. Twitter, for example, faces a derivative lawsuit alleging that executives provided misleading financial statements to hide poor performance while selling millions of dollars in personally held stock.  The threat of shareholder litigation can help constrain managerial opportunism and deter misconduct, thus serving as an important governance mechanism. Specifically, the threat of litigation can encourage managers to provide more detailed or transparent financial information to the market. In turn, enhanced information has … Read more