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Litigation Risk and Stock Return Anomaly

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Listed:
  • Jun Duanmu
  • Qiping Huang
  • Yongjia Li
  • Lingna Sun

Abstract

We create a proxy for security litigation risk using a dynamic logistic model and find that low-litigation-risk firms outperform high-litigation-risk firms. The out-of-sample long-short portfolio delivers an annual alpha of over 8%. This anomalous return is mainly driven by long positions in low-litigation-risk firms. The results are not affected by the realization of the lawsuits and are robust after controlling for other well-known anomaly factors. We provide evidence that the litigation-risk anomalous return is driven by investors’ under-reaction to the changes in firms’ litigation risk.

Suggested Citation

  • Jun Duanmu & Qiping Huang & Yongjia Li & Lingna Sun, 2022. "Litigation Risk and Stock Return Anomaly," Financial Analysts Journal, Taylor & Francis Journals, vol. 78(4), pages 145-162, October.
    • Handle: RePEc:taf:ufajxx:v:78:y:2022:i:4:p:145-162
    DOI: 10.1080/0015198X.2022.2089008
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