Working Paper: CEPR ID: DP14358
Authors: Elisabeth Kempf; Oliver G. Spalt
Abstract: This paper provides novel evidence suggesting that securities class action lawsuits, a central pillar of the U.S. litigation and corporate governance system, can constitute an obstacle to valuable corporate innovation. We first establish that valuable innovation output makes firms particularly vulnerable to costly low-quality class action litigation. Exploiting judge turnover in federal courts, we then show that changes in class action litigation risk affect the value and number of patents filed, suggesting firms take into account that risk in their innovation decisions. A new perspective we provide is that innovation success, not only innovation failure, can increase firms' securities class action litigation risk.
Keywords: Corporate Governance; Law and Economics; Innovation; Patents; Shareholder Litigation; Class Action Lawsuit
JEL Codes: N/A
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher innovation output (O36) | increased probability of subsequent low-quality class action lawsuits (K41) |
| low-quality lawsuits (K41) | increased losses to shareholders (G34) |
| increased shareholder class action litigation risk (G38) | firms patent less (L24) |
| increased shareholder class action litigation risk (G38) | decreased value of innovation output (O39) |
| innovation input (O36) | low-quality lawsuits (K41) |