Firms Sued by U.S. Take Hit on Stock Prices

Corporations that are sued by the government usually lose money through lower stock prices, regardless of how the lawsuit turns out, according to a study released Wednesday.

The study of 618 lawsuits against publicly held companies from 1981 to 1983 found that those filed by the Environmental Protection Agency were the most costly, said Sanjai Bhagat, professor of finance at the University of Colorado at Boulder.

Although environmental allegations made up only about 5% of the total number of court actions, share price drops resulted in an average $45-million loss in market capitalization, or about 3% of the value of a company’s stock.

Lawsuits over securities law violations cut market caps by 2.7%, or an average $40 million, the researchers found.

“When a government agency sues a company, that is very bad news for the company,” said Bhagat, who conducted the study with researchers from Texas A&M; University and Arizona State University.

Product liability cases generated an average 1.4%, or $22 million, reduction in market capitalization.

During the three-year period studied, 38% of lawsuits were filed by one company against another, 35% by individuals and 17% by the government. Although the government lawsuits triggered the greatest drop in share price, companies that were sued lost ground, regardless of who filed the complaint.

The study looked at lawsuits involving all companies whose shares trade on the New York and American stock exchanges.

The researchers also found that government attorneys don’t have the same incentives to settle a case that corporations do.

“They’re not going to go away just because you want to settle,” Bhagat said.

Government agencies don’t face the same financial constraints as corporations to pursue cases, the study found.