Public Dissemination of Legal Proceedings and the Pricing of Contingent Legal Losses

Abstract

Investors and regulators demand timely and objective information about firms’ contingent legal losses. Managers, however, have strong incentives not to disclose prejudicial information that could be used as an admission of guilt by litigation adversaries. We test whether the market prices contingent legal losses based on an alternative information source—federal court filings publicly accessible under the Federal Judiciary’s Public Access to Court Electronic Records (PACER) system. Our evidence suggests that, despite the seemingly mundane content of PACER filings, investors use information embedded in these court documents to price contingent legal losses during the litigation process. The market response to individual PACER filings persists through all stages of the litigation process but attenuates as the lawsuit progresses. We find only a weak market response to the final resolution of the lawsuit, consistent with PACER filings enabling investors to price the litigation outcome beforehand. Our results suggest that the public availability of court documents helps investors price contingent legal losses despite deficiencies in management disclosures.