Class action spillover effects on joint venture partners

We study spillover effects arising in joint ventures where one firm is sued. Upon their partner’s lawsuit announcement, other firms in the relationship exhibit a US$106MM market capitalization decline. Those firms are 3.4% more likely to be subsequently sued and 2.4% more likely to confront similar charges. After their partner’s lawsuit, the other venture firms increase their cash reserves but decrease dividends, investment, acquisition spending, and disclosure quality. Moreover, their volatility of stock returns, cash flows, and assets also decline. Although these firms are not named in their partner’s complaint, they suffer spillover effects that impair their valuation and growth.

Professor Eliezer Fich

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Colin Clark (39), room 125