Abstract
The substantial empirical literature on corporate litigation has only recently turned its attention to the interaction between corporate governance and litigation strategy. Haslem (2005) shows that managers at defendant firms with weak governance may be too eager to settle cases in order to avoid embarrassing disclosures. This paper extends this finding by examining the impact of agency costs on plaintiff firms’ litigation decisions. I find that firms with weaker governance show significantly lower abnormal stock returns around the time they file a lawsuit. These abnormal returns likely result from firms pursuing suits with negative value. The findings suggest that managers may derive private benefits from litigating.
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