Plaintiffs’ attorneys often issue marketing releases after public companies announce adverse corporate events. These releases typically say the attorneys are “investigating potential claims” against the company and encourage shareholders who have been harmed to contact the law firm. In a new study, we find that observing these marketing releases increases the expected likelihood and severity of subsequent litigation, consistent with attorneys’ marketing activity providing information beyond what can be surmised from the triggering corporate events themselves. Accordingly, incorporating attorneys’ marketing behavior improves the accuracy of predictions about the incidence and severity of subsequent lawsuits against companies.

FIGURE 1: Examples of Plaintiff’s Attorney Investigation Tweets and Articles

Figure 1 provides examples of the plaintiffs’ attorney investigation announcements we examine. We collect data onannouncements from 2013-2020, using keyword searches to identify them in tweets and press-release headlines from the RavenPack database. Examining a sample of 4,500 public companies over this eight-year period, we find that these announcements are relatively rare, occurring for only around 3 percent of company-months, but when they do occur, subsequent litigation is much more likely. The baseline probability of a company in our sample getting sued in the next 12 months hovers around 18.7 percent. However, for months when an investigation tweet or article about the company appears, the probability of future litigation jumps to 45-46 percent. Figure 2 illustrates that the probability of future litigation continues to rise with greater numbers of investigation-related tweets or articles during the month.

FIGURE 2: Probability of Litigation Conditional on the Frequency of Investigation Articles and Tweets

Of course, plaintiffs’ attorneys don’t issue these marketing releases randomly; they are often triggered by adverse corporate events that might form the basis for lawsuits, such as financial restatements, merger announcements, or signs of internal control weaknesses. However, even controlling for these potential triggers, we continue to find that plaintiffs’ attorney marketing remains incrementally informative about future litigation risk. Adding indicators for investigation articles and tweets to a litigation risk model increases its predictive power by 33 percent. We interpret these results as suggesting that plaintiffs’ attorneys’ marketing efforts signal their judgment about a case’s potential viability.

One limitation of our research design is that it is difficult to identify and control for all of the potential confounding events that might trigger plaintiffs’ attorney investigations in a given month. Therefore, we perform additional tests that examine the three-day window around financial restatement announcements, a known trigger for shareholder lawsuits. Even controlling for restatement characteristics that speak to the potential merits of a case, such as indication of fraud and the restatement’s financial-statement impact, the existence of plaintiffs’ attorney investigation articles or tweets in the three-day announcement window remains strongly predictive of future litigation.

We also provide evidence that social media marketing is not merely predictive of future litigation, but also plays a role in causing litigation by helping attorneys connect with potential plaintiffs. We identify a natural experiment in 2016 when there was a change in Twitter’s (now X’s) algorithm that improved the visibility of relevant content displayed in users’ feeds. If Twitter marketing actually facilitates litigation, rather than just acting as a predictive signal, we expect Twitter’s algorithm change to increase the effectiveness of attorneys’ marketing tweets, while marketing through traditional media serves as a natural control sample. Consistent with this logic, we find that investigation tweets were more likely to result in future litigation after Twitter’s algorithm change, while the effectiveness of traditional media marketing remained unchanged. These results also indicate that the effectiveness of social media in connecting attorneys with potential plaintiffs increases as social media platforms develop more effective algorithms for connecting users with relevant content.

Finally, we find that a second type of attorney marketing, which occurs after a lawsuit is filed and reminds potential plaintiffs about class certification deadlines, signals increased odds that the defendant corporation will ultimately have to pay damages as well as a higher expected damages amount. Intuitively, this suggests attorneys learn about a case’s merits over time and adjust their marketing accordingly.

Overall, our study sheds new light on the role of plaintiffs’ attorney marketing in corporate litigation. The results suggest attorneys’ marketing efforts, especially those on social media, provide an observable, timely signal of litigation risk that is incremental to the effect of triggering events, likely reflecting attorneys’ expert judgment on case merits rather than indiscriminate “corporate ambulance chasing.”

Our findings should be of significant interest to many capital market participants. Litigation risk is an important concern for corporations and their shareholders, with potential maximum losses from securities class actions reaching an all-time high of $2.25 trillion as of mid-2023.[1] For corporate managers and directors, monitoring social media for investigation announcements could provide an early warning of impending lawsuits. Equity investors may also be able to use attorney marketing to help predict portfolio companies’ negative future events. Regulators may want to consider the implications of social media for potentially amplifying plaintiffs’ attorney marketing. Finally, for researchers examining the determinants and consequences of shareholder litigation, our study points to the need to incorporate the traditional and social media activities of plaintiffs’ attorneys as a key factor, both reflecting and potentially influencing the likelihood and severity of lawsuits.

ENDNOTE

[1] https://www.cornerstone.com/wp-content/uploads/2023/07/Securities-Class-Action-Filings-2023-Midyear-Assessment.pdf(Cornerstone Research 2023, accessed April 15, 2024).

This post comes to us from Steven E. Kaplan at Arizona State University and Adi Masli, Matt Peterson, and Eric H. Weisbrod at the University of Kansas. It is based on their recent paper, “Corporate Ambulance Chasing? Plaintiff’s Attorney Marketing as a Signal of Corporate Litigation Risk,” available here.