The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy

Abstract

The risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlements and other related costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. The market value of cash is lower for firms exposed to litigation risk. Corporate investment decisions are also affected by litigation risk, as firms reduce capital expenditures in response. Our results are robust to endogeneity concerns and possible spurious temporal effects.

Employee disputes and CEO turnover: Evidence from labor lawsuits

“…Firms with employee disputes may be hoarding cash for future litigations, settlements, and costly court decision (including legal fees). Arena and Julio () document that shareholder lawsuit risk may increase cash holdings in anticipation of future settlements. Motivated by Arena and Julio (), we measure the relationship between employee disputes and cash holding in Exhibit using cash holding as a dependent variable.…”

When governance fails: Naming directors in class action lawsuits

“…Similarly, Autore et al (2014) find reductions in external debt and equity financing following a lawsuit with greater reductions when the firm either settles or loses the lawsuit. Arena and Julio (2012) find that lawsuit firms increase cash and decrease capital expenditures following a lawsuit, indicating a perceived need for liquidity. In our study, we add to this literature by examining whether naming directors is more costly for firms, both in terms of money and time.…”

Corporate Social Responsibility Disclosure and the Value of Cash Holdings

“…Recent studies find that investors value a firm's cash holdings at a sizable discount (e.g. Arena & Julio, 2015;Faulkender & Wang, 2006;Frésard & Salva, 2010;Masulis, Wang, & Xie, 2009) and suggest that high-quality financial disclosure can facilitate monitoring to mitigate the value destruction associated with cash holdings (e.g. Drobetz, Grüninger, & Hirchvogl, 2010;Louis, Sun, & Urcan, 2012).…”