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Litigation Risk Management Through Corporate Payout Policy

Published online by Cambridge University Press:  12 August 2022

Matteo P. Arena  and
Brandon Julio Open the ORCID record for Brandon Julio [Opens in a new window]
Matteo P. Arena
Affiliation:
Marquette University College of Business Administration matteo.arena@mu.edu
Brandon Julio*
Affiliation:
University of Oregon Lundquist College of Business
*
bjulio@uoregon.edu (corresponding author)
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Abstract

Firms modify their payout policy in anticipation of future litigation costs. We examine a comprehensive sample of U.S. corporate lawsuits and find that firms facing significant litigation risk pay lower dividends, and in some cases omit dividends while distributing more cash through share repurchases. Litigation risk changes the distribution of payouts but not the total payout yield as the increase in share repurchases offsets the decrease in dividends. Cash-poor firms cut share repurchases when settlement costs are incurred. The results suggest that firms at a higher risk of litigation increase their payout flexibility.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 148 - 174
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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