THE COSTS OF INEFFICIENT BARGAINING AND FINANCIAL DISTRESS - EVIDENCEFROM CORPORATE LAWSUITS

This study provides the first large-sample analysis of the stock-marke t reactions to interfirm litigation. When a suit is filed, the common stock of the typical defendant declines by about 1%, while the plainti ff experiences no significant gains. For the average pair of firms, th e combined drop in value upon filing is $21 million. Much of the loss is regained if the suit is settled. The findings suggest that bargaini ng among firm claimants sometimes leads to very inefficient outcomes. Part of the leakage is explained by the costs of increased financial d istress imposed on the defendant.