The effect of securities litigation on external financing

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 27; pp. 231 - 250
• Main Authors: Autore, Don M., Hutton, Irena, Peterson, David R., Smith, Aimee Hoffmann
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-08-2014; Elsevier Science Ltd
• Subjects: Capital expenditures; Equity financing; External debt; External financing; Information asymmetry; Investment; Investment policy; Litigation; Securities fraud; Securities litigation; Studies; K22; Information asymmetry; Securities litigation; External financing; G32; Investment
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2014.05.007

Using a comprehensive sample of securities litigation, we examine the effect of financial fraud on the subsequent use of external financing. We find that firms with a recent history of securities litigation, particularly more severe litigation, are less likely to seek external debt and equity financing. This negative relationship between prior litigation and external financing is stronger for firms with high information asymmetry. Furthermore, firms significantly reduce their investments in capital expenditures and research and development during the three years following a litigation filing. Thus, the reduction in the availability of external financing due to allegations of financial fraud can have a tangible impact upon the investment opportunities of the firm.
•We examine the effect of securities litigation on external financing.•We use a sample of 11,354 securities lawsuits filed during 1987–2009.•Litigation filing reduces likelihood of future external financing.•More severe violations result in a stronger effect.•Litigating firms subsequently reduce investment.