How Much Do Corporate Defendants Really Lose? A New Verdict on the Reputation Loss Induced by Corporate Litigation

Using a comprehensive sample of 83,260 corporate lawsuits filed in U.S. Federal District courts, we extend the results of prior studies investigating market value and reputational losses due to corporate misconduct. This larger sample allows us to examine several alternative explanations for the loss in market value, such as the impact of media coverage, the expectation of procedural expenses and subsequent litigation, and the defendant’s willingness to settle, as well as previously documented factors, such as anticipated penalties and cross-sectional firm characteristics. Our results suggest that, with the exception of securities litigation, this loss in market value can be attributed to these alternative explanations rather than to reputational consequences. We confirm this finding using indirect measures of reputation loss, such as declines in financial performance, changes in the outside directorships held by the defendant firm’s CEO, reductions in institutional ownership, CEO and CFO turnover, and improvements in corporate governance. These indirect measures also provide evidence of reputational penalties imposed upon firms accused of environmental misconduct, although this evidence is weaker and unsupported by the results of our market value loss analysis.