The effect of securities litigation on external financing |
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| Institution: | 1. College of Business, Florida State University, P.O. Box 3061110, Tallahassee, FL 32306-1110, United States;2. Department of Finance, Bentley University, 175 Forest Street, Waltham, MA 02452-4705, United States;1. Department of Finance, School of Business, Quinnipiac University, Hamden, CT 06518, United States;2. HSBC Business School, Peking University, Shenzhen, China;1. Florida Atlantic University, College of Business, Boca Raton, FL 33431, United States;2. University of Missouri, Trulaske College of Business, Columbia, MO 65201, United States;1. John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec H3G 1M8, Canada;2. College of Business and Economics, West Virginia University, 1601 University Ave., Morgantown, WV 26506-6025, United States;3. Trulaske College of Business, University of Missouri, 403B Cornell Hall, Columbia, MO 65211-2600, United States;4. School of Business and Economics, The University of Exeter, Exeter, Devon EX4 4PU, UK;1. Faculty of Management, Tel Aviv University, Israel;2. Adelaide Business School, The University of Adelaide, Australia |
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| Abstract: | Using a comprehensive sample of securities litigation, we examine the effect of financial fraud on the subsequent use of external financing. We find that firms with a recent history of securities litigation, particularly more severe litigation, are less likely to seek external debt and equity financing. This negative relationship between prior litigation and external financing is stronger for firms with high information asymmetry. Furthermore, firms significantly reduce their investments in capital expenditures and research and development during the three years following a litigation filing. Thus, the reduction in the availability of external financing due to allegations of financial fraud can have a tangible impact upon the investment opportunities of the firm. |
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