The effects of news on initial corporate lawsuits

This study examines the impact of news of initial lawsuits on the value of both the defendant and plaintiff firms. It extends Bhagat et al. [J. Financ . Econ. 35 (1994) 221.] by distinguishing between interfirm and noninterfir m lawsuits. We found that the financial markets react differently to news o n interfirm and noninterfirm lawsuits. While the financial markets react si gnificantly to news on interfirm lawsuits, their reaction to news on nonint erfinn lawsuits is insignificant. This finding provides further insight int o the effects of lawsuits on value of the firm and could shape practitioner s' efforts in designing strategies to combat the onslaught of lawsuits. Our results on interfirm lawsuits are consistent with Bhagat et al., and show that wealth leakage occurs in which corporate defendants lose more than the wealth gains experienced by the corporate plaintiffs. We also found eviden ce suggesting that firms do become somewhat "judgment proof" as a result of being a subject of numerous lawsuits. (C) 2001 Elsevier Science Inc. All r ights reserved.