Analysis of the effects of settlement of interfirm lawsuits

Paul Sergius Koku and Anique A. Qureshi
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Paul Sergius Koku: College|Graduate School of Business, Florida Atlantic University, USA, Postal: College|Graduate School of Business, Florida Atlantic University, USA
Anique A. Qureshi: Department of Accounting and Information Systems, Queens College|CUNY, Flushing, NY, USA, Postal: Department of Accounting and Information Systems, Queens College|CUNY, Flushing, NY, USA

Managerial and Decision Economics, 2006, vol. 27, issue 4, pages 307-318

Abstract: This study examines the effects of news on settlement of interfirm lawsuits. We hypothesize that the defendant firms suffer damaged reputation as news on the interfirm lawsuit remains in the 'public eye', as such ending the litigation process through settlement is good news for the defendant firms. Thus, the stock market will react positively to the defendants when news of a settlement is announced. On the other hand, settlements end the free publicity that the plaintiffs enjoy. In addition the plaintiffs settle for less money than they initially seek. Thus, the implication of a reduced cash flow expectations that the announcement of settlements brings to the plaintiffs will cancel out the positive reputation effect. Therefore, there will be no significant stock market reaction to the plaintiffs when a settlement is announced. Furthermore, the stock market will show no significant reaction to the defendants who have been the subject of more than one lawsuit in a relatively short period of time prior to a settlement because their reputation is too severely damaged to be remedied through removal of their name from the limelight. The results of our analysis support the hypotheses and offer some insight for strategy development. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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