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The Reputational Costs of Corporate Litigation: Long-Term Media Reputation Damages to Firms’ Involvement in Litigation

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Abstract

Extensive research on the financial costs and risks associated with firms targeted for litigation assumes that being sued negatively impacts firm reputation. Yet, research on the consequences of corporate litigation has focused almost exclusively on the financial ramifications associated with being defendants, solely equating reputational costs with financial costs. I challenge this overly narrow view of reputation and utilize two unique datasets—one for legal actions and the other one comprising affective content analysis across 2000 media sources—for the S&P 500 firms, across 16 years of data, to explore the media reputation effects of corporate litigation. The novel findings of this study show how the affective tone of media reporting can reflect negative normative evaluations of alleged corporate illegality that can last a long time; I find that when firms are identified as corporate defendants, overall sentiment and optimism towards these firms suffer, while affective conflict about the focal firm is increased, for at least 1 year and even beyond. These findings strongly inform research on corporate wrongdoing and litigation as well as impression management research and raise the need to expand the view of the costs of corporate litigation, beyond financial implications.

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Notes

  1. I thank an anonymous reviewer for highlighting this point.

  2. The TRRM data use bipolar scales, − 1 to 1, to assess negative versus positive affect towards the focal firm (see Maghyereh and Abdoh 2019).

  3. The reason I utilize cumulative measures is because they not only reflect the dynamic nature of reputation but also its possible cumulative nature across time and corporate events; to isolate each time period by itself will likely underestimate and distort past events and perceptions that feed onto the perception of firm conduct and image; Media reputation is built on past actions (Weigelt & Colin, 1988).

  4. I removed the few cases where firms had over 100 lawsuits as not to bias the results based on several high profile firms.

  5. This is important as to reduce transitory and overall noise or attention dedicated to firms due to events that may or may be associated with litigation such as other strategic attention grabbing decisions or the effect of other omitted variables; it helps alleviate this omitted variable bias. This is at the firm-year level of analysis, like the other TRRM variables.

  6. End of year market value is more appropriate than other measures of performance because of the context of both litigation events and the financial market response to them (Daboub et al. 1995; Mishina et al. 2010) but is also highly relevant to the potential of market value as a precursor for sentiment and its reputational character (Deephouse 2000); accounting measures of performance are thus less suitable for the context of our analysis.

  7. The final 4830 firm sample size is exhaustive of these firms.

  8. GEE—Stata xtgee—automatically removes independent variables that generate multicollinearity and will not run the analyses with them; in the analyses although both measures of litigation were strongly correlated, they were all under the threshold for collinearity removal and both run smoothly side by side. Both had VIF of under 5; VIF under 10 is the acceptable threshold for this issue (Chatterjee & Price 1991).

  9. These are common measures of firm-level risk used in extant scholarship (Amit & Wernerfelt 1990; Knopf et al. 2002).

  10. This exploration also helps with possible omission bias of ex ante firm-level risk from the final regression models. These measures were not added to the final models as they reduce the sample size drastically due to limited data availability from CRSP.

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  1. School of Economics and Business Administration, Saint Mary’s College of California, 1928 Saint Mary’s Road, Moraga, CA, 94575, USA

    Michael Hadani

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Hadani, M. The Reputational Costs of Corporate Litigation: Long-Term Media Reputation Damages to Firms’ Involvement in Litigation. Corp Reputation Rev 24, 234–246 (2021). https://doi.org/10.1057/s41299-020-00106-0

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