The Shareholder Wealth Effects of Delaware Litigation

Abstract

We collect data on the record of every action in over one thousand cases involving public companies from 2004 to 2011 in the Delaware Court of Chancery, which is the leading court for corporate law disputes in the United States. We use these data to estimate how markets respond to Delaware litigation events and characteristics such as case initiations, procedural motions, case quality, and judge identity. We find that negative abnormal returns are associated with the filing of derivative and contract cases, but we observe little effect associated with the filing of the average merger challenge. When we include measures of case quality, we see that higher quality cases increase the expected impact of derivative and contract litigation on firm value. We also develop evidence that tactics associated with multijurisdictional litigation are associated with a weakened impact of litigation on firm value. This evidence is consistent with the belief that the presence of litigation in another jurisdiction allows defense lawyers to bid down competing groups of plaintiffs’ lawyers during settlement negotiations. Finally, we show that abnormal returns are not associated with information on judicial assignment at the time of case filing, nor are they associated with judge identity at case resolution. These results suggest that the judicial impact on shareholder wealth at the time of judicial assignment and the time of case termination is too small to be statistically detected.