Liquidity Effects of Litigation Risk: Evidence from a Legal Shock

Tommaso Oliviero (), Min Park () and Hong Zou ()
Additional contact information
Min Park: University of Bristol
Hong Zou: University of Hong Kong

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: Theory offers two diverging views on the effects of ex-ante litigation risk on corporate liquidity proxied by cash holdings. Ex-ante litigation risk, however, is difficult to measure. We test the liquidity effects of ex-ante litigation risk exploiting the phase-by-phase introduction of securities class actions (SCAs) in Korea. Following the increase in litigation risk, firms significantly increase their internal liquidity, especially in firms without D&O insurance coverage or those that are financially constrained. The results hold robustly in differences-in-differences and regression discontinuity designs. We also find that the increase in ex-ante SCA risk improves firms’ stock market liquidity and valuation especially in firms that do not carry D&O insurance. Taken together, the results are consistent with the deterrence and protection effects of SCAs that increase firms’ liability risk and lower the risk that investors face in investing in firms.

Keywords: Liquidity; cash holdings; valuation; litigation risk; class action; difference-in-differences; regression discontinuity. (search for similar items in EconPapers)
JEL-codes: G30 G32 K22 (search for similar items in EconPapers)
Date: 2021-09-06, Revised 2023-01-21
New Economics Papers: this item is included in nep-cfn, nep-isf, nep-law and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Liquidity Effects of Litigation Risk: Evidence from a Legal Shock (2024)
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