Public companies routinely unlock capital by monetizing nontraditional assets. Future receivables are securitized. Intellectual property is pledged as collateral. Long-dated cash flows are sliced, priced, and traded. Even reputational assets increasingly appear – implicitly, if not formally – on corporate balance sheets.

Legal claims sit awkwardly within this landscape. They can represent large, contingent economic value. Yet they are illiquid, risky, and difficult to finance through conventional methods. Accounting rules generally prevent firms from booking claims as assets, traditional lenders hesitate to lend against them, and equity markets often discount litigation risk rather than treat claims as value-creating opportunities.

Litigation finance exists at this intersection of capital formation and legal uncertainty. Litigation finance also allows companies to convert a contingent legal claim into deployable capital, on a non-recourse basis and without diluting equity or saddling the company with traditional debt covenants.

Yet, despite operating as a form of asset-based finance, litigation funding is rarely analyzed as part of the capital markets. Instead, regulatory and academic debates overwhelmingly frame litigation finance as a problem (or solution) of civil justice – asking whether it expands access to courts, distorts settlement incentives, or compromises attorney independence.

In a new article, we argue that this framing is incomplete. Litigation finance is not only a litigation device, it is also a financing mechanism with real consequences for capital access, competitive strategy, and market structure. Viewed that way, debates over litigation finance regulation take on broader – and more consequential – meaning.

When policymakers regulate litigation finance, they are regulating not just the legal business but the capital markets. And they are regulating capital markets in a way that is more likely to harm small and medium-sized enterprises (SMEs) while protecting large companies from competition.

This reframing builds on our earlier work, which argued that litigation finance reshapes behavior not only after disputes arise, but also before they do – by altering contracting incentives, deterring opportunistic breach, and changing how parties bargain when enforceability is uncertain. That account focused on litigation finance’s temporal effects within the legal system. The current article extends the analysis outward: from how litigation finance affects disputes, to how it affects firms’ access to capital and their competitive strategies in the market.

Litigation Finance as Finance, Not Just Litigation

Treating litigation finance solely as a civil-justice phenomenon obscures its economic function. Litigation funding is a way of financing risk – specifically, legal risk – using an underlying asset that traditional capital markets often struggle to price or accept as collateral.

Once understood this way, litigation finance looks less like an anomaly and more like a familiar financial innovation: a mechanism that allows firms to transform an otherwise illiquid, contingent asset into capital that can be deployed across the business. Importantly, because money is fungible, even funding nominally limited to legal fees can free up internal capital for investment, growth, or operational stability.

This perspective also clarifies what is really being regulated when policymakers regulate litigation finance. Restrictions on funding terms, disclosure obligations, or permissible funder conduct do not merely shape litigation behavior. They also shape which firms can access this form of capital – and on what terms.

Litigation Finance as a Nonmarket Strategy

To analyze these effects systematically, the article draws on the business-school concept of nonmarket strategy – how firms use public institutions outside ordinary market transactions, such as courts and regulatory processes, to create economic value.

Under this approach, litigation finance encapsulates at least three corporate strategies:

First, litigation finance as corporate finance. Firms use legal claims as collateral to raise capital, sometimes explicitly as working capital for operations and growth. This is especially salient where traditional debt or equity is unavailable or unattractive.

Second, litigation finance as litigation strategy. Firms often litigate not merely to win individual cases, but to defend intellectual property, discipline contractual partners, or shape competitive dynamics. Litigation finance can determine which firms are able to deploy litigation as a competitive tool, rather than settling early or abandoning claims for lack of resources.

Third, litigation finance regulation itself as strategy. Firms and funders engage in lobbying, trade-association formation, and “best practices” initiatives to shape the regulatory environment governing litigation funding. These efforts are themselves nonmarket strategies aimed at structuring competition within this emerging segment of the capital markets.

Distributional Effects and the Role of Smaller Firms

Reframing litigation finance as finance also brings its distributional consequences into sharper focus. Small and medium-sized enterprises (SMEs) are particularly likely to rely on litigation finance because they often face limited access to traditional credit markets, have fewer tangible assets, and operate with thinner margins for absorbing litigation risk.

For these firms, litigation finance can function as a critical source of capital – enabling them to pursue meritorious claims, defend valuable rights, and remain competitive against better-capitalized rivals.

As a result, regulation that restricts litigation finance may have competitive effects beyond the courthouse. Limiting this form of capital can disproportionately burden smaller firms while leaving larger firms free to finance litigation through retained earnings, broad-recourse debt, or equity investment.

Rethinking Familiar Objections

This broader frame also reshapes familiar critiques of litigation finance. Many regulatory proposals focus narrowly on non-recourse funding tied to case proceeds, while leaving untouched other methods of financing litigation – such as equity investment or general-recourse debt – that may confer even greater control over a firm’s decisions.

If regulators are concerned about influence, control, or foreign involvement in litigation, then focusing exclusively on litigation funding agreements is necessarily an under-inclusive form of regulation. Other financial arrangements may pose equal or greater risks while escaping scrutiny simply because they are more familiar forms of finance.

Similarly, claims that litigation finance encourages frivolous litigation overlook the comparative rigor of funder diligence. Commercial litigation funders typically invest only after extensive evaluation of legal merits and expected value – often applying scrutiny that exceeds that involved when firms fund litigation internally.

Looking Beyond the Courthouse

Debates over litigation-finance regulation have largely focused on its law-related aspects. Our research argues that this focus is too narrow. Litigation finance is also a mechanism for allocating capital, shaping competitive strategy, and determining which firms can credibly assert their legal rights.

Recognizing litigation finance as part of the capital markets does not resolve every policy question. But it does change how those questions should be asked – and what tradeoffs should be taken seriously – when lawmakers and regulators consider the future of litigation funding.

Suneal Bedi is an associate professor at Indiana University’s Kelley School of Business, and William C. Marra is a director at Certum Group and lecturer in law at the University of Pennsylvania Carey Law School. This post is based on their article, Litigation Finance in the Market Square, available here.