The purpose of the paper is to examine the relationship between litigation risk and payout policy.
The authors employ various regression techniques including probit, logit and tobit regression methodologies to study the relationship between litigation risk (contemporaneous measures, litigation dummy) and payout policy (dividend payout likelihood and dividend yield). The authors also conduct several robustness tests.
The authors find that firms involved in a lawsuit have a lower propensity to distribute dividends to shareholders. In particular, the authors document a negative relationship between litigation risk and payout policy as measured by dividend payout likelihood and dividend yield. The results are robust to a series of robustness tests including using alternate regression specifications, alternate measures of litigation and payout policy, a propensity-score matched sample and using an instrumental variable.
The paper identifies another determinant of payout policy and documents another avenue whereby legal institutions affect corporate payout policy. The link between litigation risk and payout policy is of interest to the business community, financial economists, management and the investing public.
