The shareholder wealth implications of corporate lawsuits

The Shareholder Wealth Implications of Corporate Lawsuits

Sanjai Bhagat
University of Colorado

John Bizjak
Texas A&M University

Jeffrey L. Coles
Arizona State University

September 1996

Please address correspondence to: Sanjai Bhagat, Graduate School of Business Administration, University of Colorado, Boulder, CO 80309-0419. Tel. (303) 492-7821. bhagat@spot.colorado.edu

Abstract
This paper analyzes lawsuits in which at least one side, plaintiff or defendant, is a corporation. In particular, we provide evidence on the relative frequency of the legal issues involved, the incidence of suits by whether the opponent is another firm, governmental entity, or non-corporate private entity. Furthermore, we explore the direct and indirect costs and benefits to firms involved in different types of legal battles. Specifically, we examine the stock market reaction to filing and settlement announcements and find that characteristics of the suit, such as legal issue, type of opponent, and firm characteristics (i.e., firm size and proximity to bankruptcy) have power to explain cross-sectional variation in these wealth effects.