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Does litigation risk matter for managers’ asymmetric cost behavior?

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  • Ra, Kyeongheum
  • Kim, Grace Goun

Abstract

This study examines the effect of litigation risk on firms’ asymmetric cost behavior. Using data on filings of securities class action lawsuits from 1999 to 2019, we find that firms’ asymmetric cost behavior increases with higher litigation risk. Furthermore, we find that the effect of litigation risk on cost stickiness is more pronounced in (1) labor-intensive firms, and (2) high-tech industries. Our study contributes to the literature by suggesting that litigation risk is a valuable determinant affecting firms’ asymmetric cost behavior.

Suggested Citation

  • Ra, Kyeongheum & Kim, Grace Goun, 2023. "Does litigation risk matter for managers’ asymmetric cost behavior?," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007954
    DOI: 10.1016/j.frl.2022.103619
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    References listed on IDEAS

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    1. Agrawal, Ashwini K. & Matsa, David A., 2013. "Labor unemployment risk and corporate financing decisions," Journal of Financial Economics, Elsevier, vol. 108(2), pages 449-470.
    2. Mark C. Anderson & Rajiv D. Banker & Surya N. Janakiraman, 2003. "Are Selling, General, and Administrative Costs “Sticky”?," Journal of Accounting Research, Wiley Blackwell, vol. 41(1), pages 47-63, March.
    3. Ping-Sheng Koh & Cuili Qian & Heli Wang, 2014. "Firm litigation risk and the insurance value of corporate social performance," Strategic Management Journal, Wiley Blackwell, vol. 35(10), pages 1464-1482, October.
    4. Durongkadej, Isarin & Wei, Siqi & Rao, Ramesh, 2021. "Shareholder litigation and the risk incentive effect of executive compensation: A re-examination," Finance Research Letters, Elsevier, vol. 41(C).
    5. Clara Xiaoling Chen & Hai Lu & Theodore Sougiannis, 2012. "The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs," Contemporary Accounting Research, John Wiley & Sons, vol. 29(1), pages 252-282, March.
    6. Kim, Irene & Skinner, Douglas J., 2012. "Measuring securities litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 290-310.
    7. Blake Rayfield & Omer Unsal, 2021. "Institutional monitoring and litigation risk: Evidence from employee disputes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(1), pages 81-119, April.
    8. Kim, Jonghwan (Simon) & Ra, Kyeongheum, 2022. "Employee satisfaction and asymmetric cost behavior: Evidence from Glassdoor," Economics Letters, Elsevier, vol. 219(C).
    9. Banker, Rajiv D. & Byzalov, Dmitri & Chen, Lei (Tony), 2013. "Employment protection legislation, adjustment costs and cross-country differences in cost behavior," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 111-127.
    10. Arena, Matteo P., 2018. "Corporate litigation and debt," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 202-215.
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    Cited by:

    1. Seul Gi Oh & Kyeongheum Ra, 2024. "Does innovation matter for asymmetric cost behaviour? Evidence from forward citations to the patents," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(4), pages 3685-3711, December.

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    More about this item

    Keywords

    Asymmetric cost behavior; Litigation risk; Labor intensity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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