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This dissertation consists of two related essays examining the consequences of corporate litigation for U.S. public firms. In the first essay, we use a comprehensive sample of 83,260 cases filed and resolved in U.S. Federal District courts to extend the results of prior studies investigating market value and reputational losses due to corporate litigation. This larger sample allows us to consider for the first time several potential explanations for the loss in market value due to litigation, such as the impact of media coverage, the expectation of procedural expenses, anticipated costs of subsequent litigation, and the defendant's willingness to fight allegations rather than settle, as well as previously documented factors such as anticipated penalties and cross-sectional firm characteristics. We find that the average market value loss is significant, although much smaller than prior estimates measured using samples extracted from news sources. Our results suggest that, with the exception of securities and environmental litigation, this loss in market value can be attributed to the factors listed above rather than to reputational costs. We provide further support for this conjecture using indirect indicators of reputation loss, such as declines in financial performance, CEO and CFO turnover, changes in the number of outside directorships held by the defendant firm's CEO, improvements in corporate governance, and reductions in institutional ownership. The high level of consistency across these alternative measures of reputation loss confirms that firms subject to securities litigation and, to a lesser extent, environmental litigation suffer reputational damages. In the second essay, we use a comprehensive sample of securities litigation to examine the effect of financial fraud on the use of external financing. We find that firms with a recent history of securities litigation, particularly more severe litigation, are less likely to seek external debt and equity financing. Moreover, conditional on obtaining external financing, litigated firms do not exhibit a strong preference for debt or equity, suggesting that both forms of external financing become more costly. We also find evidence of self-selection in a sample of post-litigation equity issuers: firms seek financing after securities litigation only if they expect that the flotation costs (i.e., gross spreads, offer price discounts, and announcement reactions) will not be influenced by litigation.
A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy.
Includes bibliographical references.
David Peterson, Professor Directing Dissertation; Thomas Zuehlke, University Representative; Don Autore, Committee Member; Irena Hutton, Committee Member.
Florida State University
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