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Corporate Investment Under the Cloud of Litigation

Author

Listed:
  • Bennett, Benjamin

    (Ohio State University (OSU) - Department of Finance)

  • Milbourn, Todd

    (Washington University in Saint Louis - Olin Business School)

  • Wang, Zexi

    (University of Bern)

Abstract

We study the effect of legal risk on firms’ investment. Using legal risk measures based on the number of litigious words in SEC 10-K filings, we find legal risk reduces investment. Underlying mechanisms include both i) a financing channel, whereby legal risk reduces credit ratings, increases bank loan costs, and decreases borrowing, and ii) an attention channel, whereby legal risk consumes top-management’s attention. Accordingly, we find legal risk has negative effects on firms’ investment efficiency and stock performance. We address endogeneity concerns through a DiD analysis utilizing staggered adoptions of universal demand laws across states.

Suggested Citation

  • Bennett, Benjamin & Milbourn, Todd & Wang, Zexi, 2018. "Corporate Investment Under the Cloud of Litigation," Working Paper Series 2018-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2018-18
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    Cited by:

    1. Lu Wei & Chen Han & Yinhong Yao, 2022. "The Bias Analysis of Oil and Gas Companies’ Credit Ratings Based on Textual Risk Disclosures," Energies, MDPI, vol. 15(7), pages 1-12, March.
    2. Banerjee, Pradip & Dutta, Shantanu & Zhu, Pengcheng, 2021. "Multidimensionality of text based financial constraints and working capital management," International Review of Financial Analysis, Elsevier, vol. 77(C).
    3. Chad Brown & Jeronimo Carballo & Alessandro Peri, 2022. "Bankruptcy Shocks and Legal Labor Markets: Evidence from the Court Competition Era," Papers 2202.00044, arXiv.org.
    4. Degl'Innocenti, Marta & Fiordelisi, Franco & Song, Wei & Zhou, Si, 2023. "Shareholder litigation and bank risk," Journal of Banking & Finance, Elsevier, vol. 146(C).
    5. Malm, James & Soyeh, Kenneth W. & Kanuri, Srinidhi, 2023. "Litigation risk and corporate performance," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • K20 - Law and Economics - - Regulation and Business Law - - - General

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