Litigation Settlements, Litigation Stakes, and Financial Distress Costs

Posted: 30 Jul 2016

Date Written: August 1, 2016

Abstract

Several theoretical studies provide predictions on the relation between settlement likelihood and litigation stakes. Although models with generalizable settings argue in favor of a negative relation, certain specialized settings predict the opposite. In contrast to the theoretical literature, there is limited empirical analysis of the relation with only one study reporting evidence of a positive association. In this study, we infer how the stock market forms expectations regarding the relation between settlement likelihood and litigation stakes by analyzing stock returns around settlement announcement dates. We find that the market was more surprised when higher stakes lawsuits were settled, suggesting that higher stakes lawsuits were not expected to settle. We thus provide empirical support in favor of general theoretical models on conflict resolution that predict a positive relation between litigation stakes and settlement likelihood. Our results also have implications for studies of financial distress costs. Although we find evidence of the existence of financial distress costs, our results contradict a conclusion drawn in prior research — that the primary benefit of litigation settlements is the unexpected relief from financial distress costs.

Keywords: Litigation settlements, financial distress costs, patent lawsuits

Suggested Citation

Narayanamoorthy, Ganapathi S. and Hui, Zhou, Litigation Settlements, Litigation Stakes, and Financial Distress Costs (August 1, 2016). Australian Journal of Management, Vol. 41, No. 3, 2016, Available at SSRN: https://ssrn.com/abstract=2815872

Ganapathi S. Narayanamoorthy (Contact Author)

Tulane University - Accounting & Taxation ( email )

United States

Zhou Hui

Independent ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
309
PlumX Metrics