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Litigation risk and financial leverage

Listed author(s):
  • James Malm

    ()

    (College of Charleston)

  • Marcin Krolikowski

    ()

    (Providence College)

Registered author(s):

    Abstract In this paper, we use a unique hand-collected dataset on corporate litigation to examine the relationship between litigation risk and financial leverage. We find that an increase in litigation risk is associated with a significant decrease in total debt. Partitioning total debt into long-term debt and short-term debt, we find a negative relationship between litigation risk and long-term debt. There is no significant relationship between litigation risk and short-term debt.

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    File URL: http://link.springer.com/10.1007/s12197-015-9348-0
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    Article provided by Springer & Academy of Economics and Finance in its journal Journal of Economics and Finance.

    Volume (Year): 41 (2017)
    Issue (Month): 1 (January)
    Pages: 180-194

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    Handle: RePEc:spr:jecfin:v:41:y:2017:i:1:d:10.1007_s12197-015-9348-0
    DOI: 10.1007/s12197-015-9348-0
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    1. Greg Niehaus & Greg Roth, 1999. "Insider Trading, Equity Issues and CEO Turnover in Firms Subject to Securities Class Actions," Financial Management, Financial Management Association, vol. 28(4), Winter.
    2. Zhan Shu, Susan, 2000. "Auditor resignations: clientele effects and legal liability," Journal of Accounting and Economics, Elsevier, vol. 29(2), pages 173-205, April.
    3. Utpal Bhattacharya & Neal Galpin & Bruce Haslem, 2007. "The Home Court Advantage in International Corporate Litigation," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 625-660.
    4. Jarrell, Gregg & Peltzman, Sam, 1985. "The Impact of Product Recalls on the Wealth of Sellers," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 512-536, June.
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    7. Murphy, Deborah L. & Shrieves, Ronald E. & Tibbs, Samuel L., 2009. "Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 55-83, February.
    8. Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
    9. Qingbo Yuan & Yunyan Zhang, 2015. "Do Banks Price Litigation Risk in Debt Contracting? Evidence from Class Action Lawsuits," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(9-10), pages 1310-1340, November.
    10. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, 08.
    11. Karpoff, Jonathan M & Lott, John R, Jr, 1999. "On the Determinants and Importance of Punitive Damage Awards," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 527-573, April.
    12. Bizjak, John M & Coles, Jeffrey L, 1995. "The Effect of Private Antitrust Litigation on the Stock-Market Valuation of the Firm," American Economic Review, American Economic Association, vol. 85(3), pages 436-461, June.
    13. Karpoff, Jonathan M. & Lee, D. Scott & Martin, Gerald S., 2008. "The Cost to Firms of Cooking the Books," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(03), pages 581-611, September.
    14. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    15. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-641, August.
    16. repec:bla:joares:v:32:y:1994:i:2:p:137-164 is not listed on IDEAS
    17. Gande, Amar & Lewis, Craig M., 2009. "Shareholder-Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(04), pages 823-850, August.
    18. Romano, Roberta, 1991. "The Shareholder Suit: Litigation without Foundation?," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(1), pages 55-87, Spring.
    19. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
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