Firm-Level Litigation Risk: Measurement and Effects

Authors

Benjamin Bennett, Texas Christian University - M.J. Neeley School of BusinessFollow
Charles (Chad) Ham, Indiana University - Kelley School of BusinessFollow
Todd T. Milbourn, Southern Methodist University (SMU) - SMU Cox School of BusinessFollow
Zexi Wang, Lancaster University - Department of Accounting and FinanceFollow

Publication Date

4-15-2024

Abstract

Firms are exposed to litigation risk from various stakeholders, including investors, customers, and regulators, and prior research has shown that such risk shapes a range of corporate policies. In this study, we develop a simple and transparent measure of firm-level litigation risk by parsing SEC 10-K annual reports. This measure demonstrates strong predictability for lawsuits, even after controlling for firm characteristics, existing lawsuits, geographic factors, and various fixed effects, including firm fixed effects. This simple measure performs comparably to a more resource-intensive, AI-generated litigation risk measure. We further link our measure of litigation risk to a variety of corporate policies, including cash holdings, capital expenditures, R&D, and acquisitions, uncovering results consistent with the literature.

Document Type

Article

Keywords

Legal risk

Disciplines

Finance

DOI

10.2139/ssrn.3247688

Source

SMU Cox: Finance (Topic)

Language

English