Litigation Risk and Stock Return Anomaly. Issue 4 (2nd October 2022)

• Record Type: Journal Article
• Authors: Duanmu, Jun; Huang, Qiping; Li, Yongjia; Sun, Lingna
• Is Part Of: Financial analysts journal. Volume 78:Issue 4(2022)
• Page Start: 145
• Page End: 162
• Publication Date: 2022-10-02
• Subjects: litigation risk -- return anomaly -- risk factor; Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.1080/0015198X.2022.2089008
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract: We create a proxy for security litigation risk using a dynamic logistic model and find that low-litigation-risk firms outperform high-litigation-risk firms. The out-of-sample long-short portfolio delivers an annual alpha of over 8%. This anomalous return is mainly driven by long positions in low-litigation-risk firms. The results are not affected by the realization of the lawsuits and are robust after controlling for other well-known anomaly factors. We provide evidence that the litigation-risk anomalous return is driven by investors' under-reaction to the changes in firms' litigation risk.