Litigation Risk Management Through Corporate Payout Policy

Journal of Financial and Quantitative Analysis, forthcoming

48 Pages Posted: 28 May 2021

See all articles by Matteo P. Arena

Matteo P. Arena

Marquette University

Brandon Julio

Lundquist College of Business, University of Oregon

Date Written: May 27, 2021

Abstract

Firms significantly 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 higher risk of litigation increase their payout flexibility.

Keywords: Payout Policy, Risk Management, Litigation Risk, Financial Flexibility, Dividends, Share Repurchases

JEL Classification: G32, G35, K22, D81

Suggested Citation

Arena, Matteo P. and Julio, Brandon, Litigation Risk Management Through Corporate Payout Policy (May 27, 2021). Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=3854920

Matteo P. Arena (Contact Author)

Marquette University ( email )

College of Business Administration
P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Brandon Julio

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
291
Abstract Views
860
rank
143,388
PlumX Metrics