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Corporate litigation and debt

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  • Arena, Matteo P.

Abstract

This study examines the effect of litigation risk and litigation costs on firms’ credit ratings and debt financing. The results show that litigation affects a firm's creditworthiness and debt costs in two stages. Before a lawsuit filing, firms at higher risk of litigation have lower credit ratings, are more likely to be rated speculative grade, pay higher yields on loans and bonds, and are less likely to rely on debt financing. At the time of the lawsuit resolution, settlement costs have an additional effect on firm credit quality. Companies facing larger settlement disbursements in relation to their available cash experience a decline in credit ratings and an increase in yield spread. The results are robust to endogeneity concerns and different proxies of litigation risk.

Suggested Citation

  • Arena, Matteo P., 2018. "Corporate litigation and debt," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 202-215.
    • Handle: RePEc:eee:jbfina:v:87:y:2018:i:c:p:202-215
    DOI: 10.1016/j.jbankfin.2017.10.005
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    More about this item

    Keywords

    Corporate debt; Credit ratings; Cost of debt; Litigation; Lawsuits;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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