How Litigation Risk Affects Companies’ Liquidity
Securities litigation has become a major source of risk to businesses. From 2007 to 2016 the number of securities class actions (SCAs) filed each year increased by roughly 70 percent in the U.S. and by 115 percent worldwide (PricewaterhouseCoopers, 2017).
Many studies (e.g., Gande and Lewis, 2009; Hadlock and Sonti, 2012) show that stock prices drop when a firm or its peers are sued. However, a less researched question is how firms respond to a perceived increase in litigation risk (or ex-ante litigation risk). We are particularly interested in the effect of that risk on firms’ liquidity, on which theory … Read more