Litigation risk and corporate performance

Abstract

Sued firms are susceptible to external financing constraints, diversion of top management’s time, harmful reputational costs, higher legal fees, and loss of customers and suppliers, which can impact their performance. Using a unique hand-collected dataset on corporate lawsuits, we examine the relationship between litigation risk and operating performance. We find that firms involved in a lawsuit have lower operating performance as measured by the return on assets (ROA) and equity (ROE). Our results remain qualitatively similar to several robustness tests.