Litigation risk and working capital
ISSN: 0307-4358
Article publication date: 17 December 2018
Issue publication date: 20 February 2019
Abstract
Purpose
The purpose of this paper is to understand the association between litigation risk and working capital management.
Design/methodology/approach
The authors employ four different regression techniques (OLS regressions, regressions with industry and time controls, median regressions, and Fama Macbeth regressions) to study the relation between litigation risk (contemporaneous and lagged measures) and working capital management (cash conversion cycle (CCC) and its components). The authors also conduct numerous robustness tests.
Findings
The authors find that high-litigation risk firms tend to have longer CCC. Decomposing CCC into days receivable outstanding, days inventory outstanding and days payable outstanding, the authors find that high-litigation risk firms have longer receivable periods, take a longer time to convert inventory to cash and do not pay their suppliers promptly. These results are robust to a series of robustness tests including using an alternate measure of working capital and accounting for firm type (high-tech vs labor intensive).
Originality/value
This paper contributes in several ways to the litigation and corporate finance literature. The authors identify another determinant of working capital management and document another avenue whereby legal institutions affect short-term financial decision making. The link between litigation risk and working capital management is of interest to the business community, financial economists, management and the investing public.
Keywords
Acknowledgements
This paper forms part of a special section “Interdisciplinary finance”.
Citation
Malm, J. and Sah, N. (2019), "Litigation risk and working capital", Managerial Finance, Vol. 45 No. 1, pp. 88-102. https://doi.org/10.1108/MF-03-2018-0129
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited