Corporate Investment Under the Cloud of Litigation

Benjamin Bennett, Todd Milbourn and Zexi Wang
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Benjamin Bennett: Ohio State University (OSU) - Department of Finance
Todd Milbourn: Washington University in Saint Louis - Olin Business School
Zexi Wang: University of Bern

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We study the effect of legal risk on firms’ investment. Using legal risk measures based on the number of litigious words in SEC 10-K filings, we find legal risk reduces investment. Underlying mechanisms include both i) a financing channel, whereby legal risk reduces credit ratings, increases bank loan costs, and decreases borrowing, and ii) an attention channel, whereby legal risk consumes top-management’s attention. Accordingly, we find legal risk has negative effects on firms’ investment efficiency and stock performance. We address endogeneity concerns through a DiD analysis utilizing staggered adoptions of universal demand laws across states.

JEL-codes: G30 G31 K20 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-cfn and nep-law
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2018-18

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