Managerial Opportunism during Corporate Litigation



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    • *Haslem is from Florida State University. I thank my advisor, Utpal Bhattacharya, as well as Neal Galpin, Craig Holden, Ugur Lel, and an anonymous referee for their suggestions. I also received helpful comments from seminar participants at Florida State University, Washington State University, the University of Kansas, the University of Dayton, and the University of Texas–Arlington. All errors are my own.


Using a large sample of litigation events involving publicly listed defendants, we document a surprising fact. The resolution of litigation through a court's decision dominates settlement of litigation from the shareholders' point of view, even when the firm loses. We develop a model using agency costs within the firm to explain why the market views settlement as a negative outcome on average and find empirical evidence supporting the implications of the model. Specifically, firms with weak corporate governance settle litigation more quickly, and the market reacts more negatively to settlements involving firms with higher agency costs.