Getting rid of a heavy shield: downsizing the in-house legal department?

Marcelo J. Alvarado-Vargas and Qi Zou

American Journal of Business, 2018, vol. 33, issue 1/2, 2-17

Abstract: Purpose - The purpose of this paper is to examine the effects of the number of lawsuits on firm performance and in-house legal department size. More importantly, this paper also aims to explore the interaction effect of in-house legal department size on the aforementioned lawsuit-performance relationship. Design/methodology/approach - The empirical analyses are performed by using secondary data. Structural equation modeling is employed in order to examine multiple structural relationships between the number of lawsuits, size of in-house legal department, and firm performance. Findings - Three key findings were generated: number of lawsuits has a significant detrimental effect on firm performance; number of lawsuits is positively associated with size of in-house legal departments; and size of in-house legal departments negatively moderates the relationship between number of lawsuits and firm performance. Practical implications - The results corroborate the harmfulness of lawsuits. On the one hand, a large number of lawsuits damage the firm’s financial performance directly; on the other hand, more lawsuits lead to enlarged in-house legal departments which further aggravate the negative effects of lawsuits on firm performance. These results suggest that firms should spend more effort in properly managing legal departments. Originality/value - This paper contributes to the literature by empirically examining the economic impacts of lawsuits on firm performance. Moreover, it also explored the notion that having a large size of in-house legal department does not mitigate, but aggravates the harmfulness of lawsuits on firm performance.

Keywords: Downsizing; Financial performance; Lawsuits; Legal department size (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajbpps:ajb-08-2017-0022

DOI: 10.1108/AJB-08-2017-0022

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