THE CAPITAL MARKET REACTION TO LAWSUITS: SOME ADDITIONAL EVIDENCE

Abstract

This paper studies the effects of lawsuit settlements on stockholders and bondholders. It is hypothesized that successful plaintiffs and unsuccessful defendants will gain and lose wealth respectively upon the settlement of litigation. Furthermore, the riskiness of equity returns will be altered. The equity beta of plaintiffs (defendants) is expected to decrease (increase) after the verdict. Nonetheless, the variance of stock returns for both parties is anticipated to decrease. The results support the wealth impact hypothesis for both stockholders and bondholders. However, even though the variance of returns does drop for both parties after the settlement, the drop is not statistically significant. Lastly, the beta of both plaintiffs and defendants insignificantly decreases.

Citation

Cox, R.A.K. and Means, D.B. (1999), "THE CAPITAL MARKET REACTION TO LAWSUITS: SOME ADDITIONAL EVIDENCE", International Journal of Commerce and Management, Vol. 9 No. 1/2, pp. 45-58. https://doi.org/10.1108/eb047382