Hostname: page-component-745bb68f8f-d8cs5 Total loading time: 0 Render date: 2025-01-13T03:07:38.375Z Has data issue: false hasContentIssue false
  • English
  • Français

Litigation Risk Management Through Corporate Payout Policy

Published online by Cambridge University Press:  12 August 2022

Matteo P. Arena  and
Brandon Julio Open the ORCID record for Brandon Julio [Opens in a new window]
Matteo P. Arena
Affiliation:
Marquette University College of Business Administration [email protected]
Brandon Julio*
Affiliation:
University of Oregon Lundquist College of Business
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Firms modify their payout policy in anticipation of future litigation costs. We examine a comprehensive sample of U.S. corporate lawsuits and find that firms facing significant litigation risk pay lower dividends, and in some cases omit dividends while distributing more cash through share repurchases. Litigation risk changes the distribution of payouts but not the total payout yield as the increase in share repurchases offsets the decrease in dividends. Cash-poor firms cut share repurchases when settlement costs are incurred. The results suggest that firms at a higher risk of litigation increase their payout flexibility.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 148 - 174
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Appel, I. “Governance by Litigation.” Working Paper, Boston College (2016).CrossRefGoogle Scholar
Arena, M. P. “Corporate Litigation and Debt.” Journal of Banking and Finance, 87 (2018), 202–205.10.1016/j.jbankfin.2017.10.005CrossRefGoogle Scholar
Arena, M. P., and Julio, B.. “The Effects of Securities Litigation on Corporate Liquidity and Investment Policy.” Journal of Financial and Quantitative Analysis, 50 (2015), 251–275.CrossRefGoogle Scholar
Bennett, B.; Milbourn, T. T.; and Wang, Z.. “Corporate Investment Under the Cloud of Litigation.” Working Paper, Ohio State University (2018).CrossRefGoogle Scholar
Bolton, P.; Chen, H.; and Wang, N.. “A Unified Theory of Tobin’s Q, Corporate Investment, Financing, and Risk Management.” Journal of Finance, 66 (2011), 1545–1578.CrossRefGoogle Scholar
Bonaime, A. A.; Hankins, K. W.; and Harford, J.. “Financial Flexibility, Risk Management, and Payout Choice.” Review of Financial Studies, 27 (2014), 1074–1101.CrossRefGoogle Scholar
Boudoukh, J.; Michaely, R.; Richardson, M.; and Roberts, M.. “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.” Journal of Finance, 62 (2007), 877–916.CrossRefGoogle Scholar
Crane, A. D., and Koch, A.. “Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment.” Management Science, 64 (2018), 1–20.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R. M.. “Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life-Cycle Theory.” Journal of Financial Economics, 81 (2006), 227–254.CrossRefGoogle Scholar
Engelmann, K., and Cornell, B.. “Measuring the Cost of Corporate Litigation: Five Case Studies.” Journal of Legal Studies, 17 (1988), 377–399.CrossRefGoogle Scholar
Fama, E. F., and French, K.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–44.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 71 (1973), 607–636.CrossRefGoogle Scholar
Field, L.; Lowry, M.; and Shu, S.. “Does Disclosure Deter or Trigger Litigation?” Journal of Accounting and Economics, 39 (2005), 487–507.10.1016/j.jacceco.2005.04.004CrossRefGoogle Scholar
Floyd, E.; Li, N.; and Skinner, D. J.. “Payout Policy through the Financial Crisis: The Growth of Repurchases and the Resilience of Dividends.” Journal of Financial Economics, 118 (2015), 299–316.10.1016/j.jfineco.2015.08.002CrossRefGoogle Scholar
Froot, K. A., and Stein, J. C.. “Risk Management, Capital Budgeting, and Capital Structure Policy for Financial Institutions: An Integrated Approach.” Journal of Financial Economics, 47 (1998), 55–82.10.1016/S0304-405X(97)00037-8CrossRefGoogle Scholar
Gande, A., and Lewis, G. M.. “Shareholder-Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers.” Journal of Financial and Quantitative Analysis, 44 (2009), 823–850.CrossRefGoogle Scholar
Gormley, T. A., and Matsa, D. A.. “Growing out of Trouble? Corporate Responses to Liability Risk.” Review of Financial Studies, 8 (2011), 2781–2821.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “Dividends, Share Repurchases, and the Substitution Hypothesis.” Journal of Finance, 57 (2002), 1649–1684.CrossRefGoogle Scholar
Grullon, G.; Paye, B.; Underwood, S.; and Weston, J.. “Has the Propensity to Pay out Declined?” Journal of Financial and Quantitative Analysis, 46 (2011), 1–24.CrossRefGoogle Scholar
Guay, W., and Harford, J.. “The Cash-Flow Permanence and Information Content of Dividend Increases versus Repurchases.” Journal of Financial Economics, 57 (2000), 385–415.CrossRefGoogle Scholar
Hanley, K. W., and Hoberg, G.. “Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 103 (2012), 235–254.CrossRefGoogle Scholar
Hoberg, G., and Prabhala, N. R.. “Disappearing Dividends, Catering, and Risk.” Review of Financial Studies, 22 (2009), 79–116.CrossRefGoogle Scholar
Jagannathan, M.; Stephens, C. P.; and Weisbach, M. S.. “Financial Flexibility and the Choice between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355–384.CrossRefGoogle Scholar
Kim, I., and Skinner, D. J.. “Measuring Securities Litigation Risk.” Journal of Accounting and Economics, 53 (2012), 290–310.10.1016/j.jacceco.2011.09.005CrossRefGoogle Scholar
Lintner, J. “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes.” American Economic Review, 46 (1956), 97–113.Google Scholar
Lowry, M., and Shu, S.. “Litigation Risk and IPO Underpricing.” Journal of Financial Economics, 65 (2002), 309–335.CrossRefGoogle Scholar
Michaely, R.; Rossi, S.; and Weber, M.. “Signaling Safety.” Chicago Booth Paper No. 17-30 (2019).CrossRefGoogle Scholar
Miller, M. H., and Rock, K.. “Dividend Policy Under Asymmetric Information.” Journal of Finance , 40 (1985), 1031–1051.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 3 (1987), 703–708.CrossRefGoogle Scholar
Peng, L., and Roell, A.. “Executive Pay and Shareholder Litigation.” Review of Finance, 12 (2008), 141–184.10.1093/rof/rfl003CrossRefGoogle Scholar
Skinner, D. J. “Earnings Disclosures and Stockholder Lawsuits.” Journal of Accounting and Economics, 29 (1997), 173–205.Google Scholar
Supplementary material: PDF

Arena and Julio supplementary material

Online Appendix

Download Arena and Julio supplementary material(PDF)
PDF 318.9 KB