The shareholder wealth implications of corporate lawsuits

This paper examines lawsuits in which at least one side, plaintiff or defendant, is a corporation. We provide evidence on the relative frequency of the legal issues involved and on the incidence of suits according to whether the other party is another firm, a government entity, or a non-corporate private entity. To explore the direct and indirect costs and benefits to firms involved in different types of legal disputes, we examine the stock market reaction to filing and settlement announcements. We find that the characteristics of the suit, such as the legal issue and type of opponent, and firm characteristics, such as firm size and proximity to bankruptcy, have power to explain cross-sectional variation in these wealth effects.