CBR Briefing #80

A line chart of US companies’ cumulative excess stock return around the time a meritless class action lawsuit was filed against them, with percentage change on the y-axis and a timeline of days before and after the filing on the x-axis. One line tracks top innovators, according to their patents’ economic value, starting at zero percent four days before a filing and dropping to around negative three percent ten days after the filing. A second line tracks noninnovators, with not patents of value in the prior year, starting in the same place and dropping to only about negative one-point-seven-five percent over the same time period.

The more innovative a company, the more meritless lawsuits it faces

  • Highly innovative companies tend to attract a disproportionate share of costly, meritless class-action lawsuits, according to research by Chicago Booth’s Elisabeth Kempf and Tilburg University’s Oliver Spalt.
  • Using data on more than 880 lawsuits filed between 1996 and 2011 against 6,099 US companies, the researchers find that innovators were several times more likely to be the target of a meritless lawsuit—one that was dismissed by a federal court and wasn’t settled—than other companies in the same industry and year.
  • Successful innovators lost 2.8 percent of market value in the seven days around a lawsuit filing, about 1 point more than companies that are less innovative, the research finds. Because innovative companies tend to be larger, the corresponding losses amounted to $95 million for a successful innovator, but $13 million for a less innovative company.

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