Updates from Chicago Booth

Class action lawsuits hit innovative companies the hardest
By Alex Verkhivker – Corporate America has long complained that many class action suits are frivolous and an unfair tax on business. Lawyers have a financial incentive to file meritless suits because companies are often willing to settle—even when allegations are false—to save time, money, and public image. Lawmakers in Congress have wrestled with this issue for years without resolution.

But research suggests more reason to address it: the costs of such litigation weigh disproportionately on the most innovative US corporations, according to Chicago Booth’s Elisabeth Kempf and Tilburg University’s Oliver Spalt. Using data on more than 40,000 lawsuits filed between 1996 and 2011 against 6,111 companies, the researchers find that frivolous lawsuits tended to focus on highly innovative businesses, which represented juicy targets—and cost the average company in this group $1.1 million a year, or about 4 percent of annual profit gains. more>


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