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Litigation settlements, litigation stakes, and financial distress costs

Author

Listed:
  • Ganapathi S Narayanamoorthy

    (A.B. Freeman School of Business, Tulane University, New Orleans, LA, USA)

  • Hui Zhou

    (Melbourne Business School, University of Melbourne, Carlton, VIC, Australia)

Abstract

Several theoretical studies provide predictions on the relation between settlement likelihood and litigation stakes. Although models with generalizable settings argue in favor of a negative relation, certain specialized settings predict the opposite. In contrast to the theoretical literature, there is limited empirical analysis of the relation with only one study reporting evidence of a positive association. In this study, we infer how the stock market forms expectations regarding the relation between settlement likelihood and litigation stakes by analyzing stock returns around settlement announcement dates. We find that the market was more surprised when higher stakes lawsuits were settled, suggesting that higher stakes lawsuits were not expected to settle. We thus provide empirical support in favor of general theoretical models on conflict resolution that predict a positive relation between litigation stakes and settlement likelihood. Our results also have implications for studies of financial distress costs. Although we find evidence of the existence of financial distress costs, our results contradict a conclusion drawn in prior research—that the primary benefit of litigation settlements is the unexpected relief from financial distress costs.

Suggested Citation

  • Ganapathi S Narayanamoorthy & Hui Zhou, 2016. "Litigation settlements, litigation stakes, and financial distress costs," Australian Journal of Management, Australian School of Business, vol. 41(3), pages 459-483, August.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:3:p:459-483
    DOI: 10.1177/0312896214550532
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Litigation settlements; financial distress costs; patent lawsuits;
    All these keywords.

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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