A firm may see adjustments to its cost of equity capital either at the time a shareholder lawsuit is filed or when the outcome of the lawsuit is determined—or both—says a new paper by William J. Moser
(Miami University). At the time of filing, if “the probability of a favorable outcome for the firm (dismissal or win) is relatively higher, the effect of the shareholder lawsuit on firm ex ante cost of equity capital is low,” the paper says. “In contrast, a high probability of a settlement or a loss for the firm results in a greater increase in firm ex ante cost of equity capital.” When the case is resolved, firm ex ante cost of equity capital adjusts only when the final resolution is different from initial probability estimates. The paper is “The Reaction of Firm Ex Ante Cost of Equity Capital to Initiation and Resolution of Shareholder Lawsuits.”
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