Our recent paper uses the Wall Street Journal’s coverage of the stock option backdating scandal to examine whether media coverage causes meritorious shareholder litigation. While the media has a prominent role in covering corporate scandals, it is unclear whether the media coverage itself causes any subsequent litigation because the underlying corporate misconduct and firm characteristics may cause both the litigation and attract media coverage. Thus, meritorious litigation may have eventually occurred even in the absence of media coverage. Evidence on the causal relation between media coverage and meritorious litigation is timely due to growing concerns about the precipitous decline in newspapers nationwide and whether it will result in a significant decrease in corporate accountability (Grieco 2020; Knight Foundation 2019). The findings further have a number of important implications for the media, firms, and others.
We predict that media coverage will increase the likelihood of meritorious litigation because such coverage may increase the expected payoff of such litigation to plaintiffs’ lawyers. Specifically, the expected payoff is a function of the settlement probability, expected settlement amount, and expected litigation costs, and media coverage may affect each of these components. That is, media coverage can provide new “expert witness” information or increase the credibility of existing information, increasing both the probability of settlement and expected settlement amount. Additionally, negative media coverage may contribute to an abnormal price decrease, which may increase the settlement probability by establishing loss causation and increase settlement amounts by increasing shareholder damages. Finally, media coverage may lower investigation costs. That is, plaintiffs’ lawyers may rely on experts cited by the media, and coordination costs may be lowered by making it easier to assemble a class of affected plaintiffs.
