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The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy

Published online by Cambridge University Press:  08 June 2015

Matteo Arena  and
Brandon Julio
Matteo Arena
Affiliation:
matteo.arena@marquette.edu, College of Business Administration, Marquette University, Milwaukee, WI 53201
Brandon Julio*
Affiliation:
bjulio@uoregon.edu, Lundquist College of Business, University of Oregon, Eugene, OR 97403.
*
*Corresponding author: bjulio@uoregon.edu
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Abstract

The risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlements and other related costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. The market value of cash is lower for firms exposed to litigation risk. Corporate investment decisions are also affected by litigation risk, as firms reduce capital expenditures in response. Our results are robust to endogeneity concerns and possible spurious temporal effects.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 251 - 275
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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