Abstract
In this paper, we use a unique hand-collected dataset on corporate litigation to examine the relationship between litigation risk and financial leverage. We find that an increase in litigation risk is associated with a significant decrease in total debt. Partitioning total debt into long-term debt and short-term debt, we find a negative relationship between litigation risk and long-term debt. There is no significant relationship between litigation risk and short-term debt.
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Notes
Tobit model is a censored regression methodology. This technique is designed to estimate linear relationships between variables when there is either left- or right-censoring in the dependent variable. The results continue to hold under this methodology.
Surprisingly, the coefficient of the interacting between litigation risk and debt increasing event is positively related to leverage.
We thank an anonymous referee for bringing this to our attention.
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Malm, J., Krolikowski, M. Litigation risk and financial leverage. J Econ Finan 41, 180–194 (2017). https://doi.org/10.1007/s12197-015-9348-0
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DOI: https://doi.org/10.1007/s12197-015-9348-0