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Litigation risk, financial distress, and the use of subsidiaries

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  • Ligon, James A.
  • Malm, James

Abstract

Using a unique hand-collected dataset on corporate subsidiaries and lawsuits, we examine the relationship between litigation risk and subsidiary usage by large U.S. corporations. We find that firms, in general, tend to have a large number of subsidiaries when exposed to high litigation risk. We find that this tendency is strong in firms with relatively low financial position, while it is less pronounced in firms with relatively high financial position. High severity litigation risk matters more than low severity litigation risk. The results are consistent with the predictions of theoretical models and suggest an efficient link between litigation risk and subsidiary usage.

Suggested Citation

  • Ligon, James A. & Malm, James, 2018. "Litigation risk, financial distress, and the use of subsidiaries," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 255-272.
    • Handle: RePEc:eee:quaeco:v:67:y:2018:i:c:p:255-272
    DOI: 10.1016/j.qref.2017.07.008
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    Cited by:

    1. Malm, James & Soyeh, Kenneth W. & Kanuri, Srinidhi, 2023. "Litigation risk and corporate performance," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. Wongsinhirun, Nopparat & Chatjuthamard, Pattanaporn & Jiraporn, Pornsit & Lee, Sang Mook, 2024. "Customer concentration and shareholder litigation risk: Evidence from a quasi-natural experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    3. Anutchanat Jaroenjitrkam & Sirimon Treepongkaruna & Pornsit Jiraporn, 2022. "Does shareholder litigation risk promote or hinder corporate social responsibility? A quasi‐natural experiment," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(3), pages 657-674, May.
    4. Malm, James & Adhikari, Hari P. & Krolikowski, Marcin W. & Sah, Nilesh B., 2021. "The old guard: CEO age and corporate litigation," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    5. Wang, Qiming & Cheng, C.S Agnes & Lian, Qin & Liu, Cathy Zishang, 2022. "Law firm market share and securities class action litigation outcomes," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 596-609.
    6. Pat Akey & Ian Appel, 2021. "The Limits of Limited Liability: Evidence from Industrial Pollution," Journal of Finance, American Finance Association, vol. 76(1), pages 5-55, February.
    7. Unsal, Omer, 2019. "Employee relations and firm risk: Evidence from court rooms," Research in International Business and Finance, Elsevier, vol. 48(C), pages 1-16.

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    More about this item

    Keywords

    Ownership structure; Parent-subsidiary; Litigation risk; Insolvency put;
    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
    • K2 - Law and Economics - - Regulation and Business Law

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