The Real Cost of Litigation : Evidence From Security Class Actions and M&As

We investigate the influence of ongoing security class action lawsuits (SCAs) on takeover premiums, M&A announcement returns, and the likelihood of deal completion. Targets subject to an SCA receive between 7.6 and 10.2 percentage points lower takeover premiums, with this negative effect extending to target M&A announcement returns. Acquirers of firms subject to ongoing litigation likewise experience more pronounced share price reductions than acquirers of targets not subject to litigation. Categorizing SCAs by their ultimate outcome reveals that these negative effects are more pronounced if the SCA is ultimately settled rather than dismissed. Our results hold for a variety of robustness tests that address potential endogeneity concerns. We further show that the presence of an ongoing SCA weakens the positive impact of termination fees on the likelihood of deal completion. Our results highlight the significant and economically relevant impact of litigation on major corporate events