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The effect of securities litigation on external financing

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  • Autore, Don M.
  • Hutton, Irena
  • Peterson, David R.
  • Smith, Aimee Hoffmann

Abstract

Using a comprehensive sample of securities litigation, we examine the effect of financial fraud on the subsequent use of external financing. We find that firms with a recent history of securities litigation, particularly more severe litigation, are less likely to seek external debt and equity financing. This negative relationship between prior litigation and external financing is stronger for firms with high information asymmetry. Furthermore, firms significantly reduce their investments in capital expenditures and research and development during the three years following a litigation filing. Thus, the reduction in the availability of external financing due to allegations of financial fraud can have a tangible impact upon the investment opportunities of the firm.

Suggested Citation

  • Autore, Don M. & Hutton, Irena & Peterson, David R. & Smith, Aimee Hoffmann, 2014. "The effect of securities litigation on external financing," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 231-250.
  • Handle: RePEc:eee:corfin:v:27:y:2014:i:c:p:231-250
    DOI: 10.1016/j.jcorpfin.2014.05.007
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    Cited by:

    1. repec:eee:corfin:v:46:y:2017:i:c:p:411-441 is not listed on IDEAS
    2. Pan, Lee-Hsien & Lin, Chien-Ting & Lee, Shih-Cheng & Ho, Kung-Cheng, 2015. "Information ratings and capital structure," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 17-32.
    3. Crutchley, Claire E. & Minnick, Kristina & Schorno, Patrick J., 2015. "When governance fails: Naming directors in class action lawsuits," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 81-96.
    4. repec:eee:jbfina:v:87:y:2018:i:c:p:202-215 is not listed on IDEAS

    More about this item

    Keywords

    Securities litigation; External financing; Information asymmetry; Investment;

    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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