Under an offer of settlement' rule, a party to a lawsuit may make a special offer to settle with the other party, such that if the other party rejects this offer, then this offer (unlike an ordinary offer) becomes part of the record in the case and may affect the allocation of litigation costs....

Shareholder litigation risk, measured using the staggered adoption of universal demand (UD) laws in 23 states from 1989 to 2005, has a negative effect on stock returns. Using a difference-in-differences design, we find that, following the passage of the laws, firms have lower stock returns....

This note reexamines the theory of optimal public enforcement when litigation costs are incurred if the defendant is prosecuted at trial, and when an out-of-court settlement is possible. Using a numerical example, it is shown that settlements and litigation costs can substantially alter the...

Firms face a greater risk of lawsuits for overstated rather than understated earnings or net assets, suggesting conservatism can reduce firms’ expected legal costs. Because managers with legal expertise are more likely than other managers to recognize the legal benefits of conservatism, this...

When the cost of a suit exceeds the expected judgment, will a potential plaintiff be able to extract any amount in settlement from the defendant? If so, what is the source of the plaintiff's ability to extract a settlement? This essay discusses existing theories as to why (and when) plaintiffs...

We study how the spillover of peer firms’ litigation risk affects a focal firm’s voluntary disclosure. We find that focal firms facing greater litigation risk spillovers reduce disclosure activities by lowering both the likelihood of issuance and the frequency of management earnings...

We analyze the extent to which private defensive litigation insurance deters patent assertion by non-practicing entities (NPEs). We study the effect that a patent-specific defensive insurance product, offered by a leading litigation insurer, had on the litigation behavior of insured patents’...

This study examines whether directors' and officers' (D&O) insurers and lenders effectively monitor securities litigation and respond through pricing before case outcomes are known. By “monitoring,” we refer to tracking case progress and obtaining information from the insured (defendant)...

Litigation finance refers to investments in litigation by a third person not originally a party to the suit. Whether the country should embrace this new practice has sparked debate among the bar, on the Hill, in the press, and between scholars. We disagree with the premise of this debate;...

Litigation finance companies have some incentives to screen plaintiffs applying for financing based on the strength of their claims, but a company may still have incentives to provide financing when the probability that a plaintiff would prevail at litigation is low. The result is that...

This paper documents that changes in litigation risk affect corporate voluntary disclosure practices. We make causal inferences by exploiting three legal events that generate exogenous variations in firms' litigation risk. Using a matching-based, fixed-effect difference-indifferences design, we...

We consider the importance of legal opportunism as an explanation for observed litigation following a large sample of initial public offerings (IPOs). We characterize legal opportunism as litigation based on the potential to recover losses after negative stock price developments rather than the...

Exploiting a legal regime change in China in 2005 that significantly increased auditors' legal liability, we reexamine why auditors are more likely to issue modified audit opinions (MAOs) to clients who receive negative press coverage before audit report dates. We find that the probability for...

The United States judicial system is in the midst of great and fundamental change with regard to the funding of litigation. Historically, parties financed litigation out of their own literal or figurative pockets or, perhaps with the assistance of some sort of contingent fee representation....

According to the existing literature, institutional investors have a significant impact on the litigation risk of publicly traded companies. This should be particularly true after the Private Securities Litigation Reform Act (PSLRA) of 1995 that encourages institutional investors to serve as...