Essays on financial market aspects of corporate lawsuits and investor sentiment in stock markets

This dissertation’s first subject area considers the impact of legal proceedings on corporate valuation. The first paper of this subject area analyzes the shareholder wealth effects of corporate prosecution settlements in the U.S. from 2001 to 2014. The results show that the settlement of criminal prosecution leads to positive shareholder wealth effects due to the resolution of uncertainty. Stockholders generally view the announcement of plea agreements more positively than the announcement of deferred prosecution and non-prosecution agreements. Therefore, the argument that particularly large corporations are treated preferentially and suffer comparatively less when using pretrial diversions cannot be confirmed by the empirical results. The second paper considers the reaction of banks’ stocks, bonds, and credit default swaps to the announcements of monetary penalties. From 2005 to 2015, the 25 largest global financial institutions paid combined more than $285 billion in legal penalties. A reduction in default risk and lower financing costs, as well an increase in the stock market valuation is observed, suggesting that banks benefit from settling lawsuits. Again, the positive reaction is likely driven by the resolution of uncertainty. While the sued bank’s systemic risk increases in the size of the relative monetary penalty, also positive spillover effects to other banks facing pending lawsuits with the same plaintiff are observed, demonstrating the systemic effect of law enforcement against banks. Furthermore, banks appear to correctly anticipate penalties, as they are cash flow-effective but not income-effective in the year they are announced. In the second subject area of this dissertation, the impact of self-disclosed sentiment on the stock market is investigated using the two major social media platforms Seeking Alpha (SA) and StockTwits (ST). It is found that negative self-disclosed sentiment on SA produces economically significant negative returns on the next day. In contrast, self-disclosed disagreement and positive self-disclosed sentiment on ST induce significant trading volume the next day. Both effects are predominantly driven by small stocks. The results indicate that self-disclosed sentiment is a powerful means of measurement and that the quality oriented SA is connected to stock returns while the quantity oriented ST is connected to trading activity.