Abstract

This paper investigates whether litigation impacts merger and acquisition outcomes for defendant firms. Our results indicate that being a defendant of a single lawsuit within the last two years appears to significantly increase the premium paid to this firm when it becomes the target of a takeover attempt, while incurring multiple lawsuits over this time frame decreases the premium (albeit not significantly so). Litigation is also correlated with takeover announcements, as incurring lawsuits within the last two years is associated with a significant increase in target firm candidacy (the likelihood of becoming a target), and incurring litigation after the takeover announcement is associated with a significant decrease in takeover completion. We explain our results through investor overreaction and uncertainty avoidance.