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Article
Publication date: 17 December 2018

James Malm and Nilesh Sah

The purpose of this paper is to understand the association between litigation risk and working capital management.

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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.

Details

Managerial Finance, vol. 45 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 18 May 2020

Kelly Carter

Much evidence exists that rational investors factor rational information into their valuation of shares. This paper aims to examine whether sentimental investors do the same.

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Abstract

Purpose

Much evidence exists that rational investors factor rational information into their valuation of shares. This paper aims to examine whether sentimental investors do the same.

Design/methodology/approach

To investigate this issue, the author measures sentimental investors’ reaction to the surprise player transactions of the Boston Celtics, which traded on the New York Stock Exchange for 18 years. The team’s shares were bought mainly as souvenirs by sports fans, whose largely unwavering support makes them perhaps the least likely investors to be influenced by rational information. Thus, if the team’s share price changes because of the arrival of rational information, evidence that sentimental traders price rational information into their valuation of a stock will exist.

Findings

An acquired player’s salary, education and firm-specific experience with the Boston Celtics cause higher returns. This result provides evidence that sentimental traders factor rational information into their valuations of shares. On a broader scale, the findings underscore the importance of rational information to the valuation process, as even sentimental investors price rational information into a stock that is held for sentimental reasons. Moreover, the results are consistent with the nudge theory, in that the arrival of rational information encourages (i.e. nudges) sentimental investors to price the rational information as a rational investor world.

Originality/value

This study is the first to show that sentimental traders also factor rational information into the valuation process – an idea that was likely assumed prior to this study, but was never substantiated.

Details

Managerial Finance, vol. 46 no. 9
Type: Research Article
ISSN: 0307-4358

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