Class Action Spillover Effects on Joint Venture Partners

Firms exhibit a US$106MM average market capitalization decline when a lawsuit against their joint venture partner is announced. Following their partner's lawsuit, the probability of facing similar litigation increases for other firms in the venture, and such legal action is 2.3 times more likely whenever all partners share a common institutional owner. After their partner's lawsuit, the non-sued venture firms increase cash reserves but decrease dividends, investment, acquisition spending, and disclosure quality. Moreover, their volatility of stock returns, cash flows, and assets also decline. Although these venture firms are not named in their partner's complaint, they suffer value-reducing spillover effects