Do Women Stay Out Of Trouble? Evidence From Corporate Litigation
University of Alabama – Culverhouse College of Commerce & Business Administration
College of Charleston
July 7, 2015
We use a unique hand-collected dataset on corporate lawsuits to examine the effect of female representation in top management on corporate litigation. After controlling for other important variables and accounting for endogeneity using a novel instrument, we find that firms with higher representation of women in the top management team face fewer lawsuits overall, particularly lawsuits related to product liability, environment, medical liability, labor and contracts. Among firms with higher litigation risk, greater representation of female executives positively impacts the value of cash holdings. Overall, our results uncover an important and previously unidentified benefit of gender diversity in top management.
Do Women Stay Out Of Trouble? Evidence From Corporate Litigation – Introduction
Being sued is an unpleasant reality for firms. Lawsuits can lead to significant monetary and reputational damages for defendant firms, and can diminish their relationships with customers, suppliers, investors, and other stakeholders. Some lawsuits linger in courts for several years and even drive firms to bankruptcy. Defendant firms lose significant wealth upon lawsuit filing (e.g., Bhagat and Romano (2002)). Firms spend billions of dollars in legal fees to avoid and defend lawsuits.1 For instance, in 2004 Merck recalled Vioxx, an anti-inflammatory drug, from the market due to concerns that it might increase the risk of heart attack and stroke. Shortly thereafter, many patients who took Vioxx sued Merck. In response, the company set aside millions of dollars in reserves to pay for the potential legal costs.
Given the financial and reputational impacts of litigation, it is surprising that little research has been done to identify the determinants of different types of corporate lawsuits. The existing literature mostly focuses on securities class action lawsuits (e.g. Gande and Lewis (2009), and Kim and Skinner (2012)), which are a small subset of all corporate lawsuits. In fact, every year companies get sued for many other reasons by dissatisfied customers, employees, competitors, suppliers, and the government. For instance, in the highly publicized McDonald’s hot coffee case, a product liability suit, the jury awarded plaintiff Stella Liebeck nearly $3 million in punitive damages for the burns she suffered after spilling hot coffee on her lap. The largest accidental marine oil spill in the history of the petroleum industry, the BP Deepwater Horizon oil spill claimed eleven lives and had a significant impact on the marine environment. As of July 31, 2013, BP has spent an estimated $42.4 billion for clean-up costs, fines and compensation. Apple Inc. is involved in numerous multinational lawsuits over technology patent infringements, part of the ‘patent wars’ among the world’s largest smartphone manufacturers such as Apple, Google, Samsung, Microsoft, Sony and Nokia. Other prominent examples include the 1994 litigation involving major breast implant manufacturers that was settled for $3.4 billion, and the Tobacco Master Settlement Agreement, in which tobacco companies agreed to pay $206 billion over a period of 25 years.
Some lawsuits are almost a part of routine business. Others arise from human values, hubris and behavioral biases. Highlighting the importance of human behavior in litigation, Hutton, Jiang and Kumar (2015) find that firms with differing political values face different types of lawsuits: Republican-leaning firms are more likely to be the subject of civil rights, labor, and environmental disputes, while Democratic-leaning firms are more likely to be subjects of securities and intellectual property disputes. Using a similar measure of corporate culture, Di Giuli and Kostovetsky (2014) find that behavioral factors lead to differences in how responsible firms appear to stakeholders. In addition, Banerjee et al. (2014) find that executive overconfidence increases the likelihood of securities class action lawsuits.
In this paper, we examine a behavioral determinant of corporate lawsuits by examining its relation with gender diversity in top management. To do so, we hand-collect a novel dataset on different types of corporate lawsuits. The issue of how gender diversity affects a firm’s litigation risk perhaps has never been more relevant given that women number an all-time high of more than 14 percent of the officers at Fortune 500 companies in 2014. For several reasons, we expect firms with a greater proportion of women in top management to face fewer lawsuits. The first reason is gender differences in risk-aversion. Actions that can lead to a firm being sued likely have ex-ante higher risk and higher expected returns.
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