A recent research conducted by the Tippie College of Business analyzed Fortune magazine’s yearly compilation of the Most Admired Companies, finding that fraud lawsuits which are dismissed as lacking merit or settle quickly do not cause any long-term reputational damage to the defendant firm.
The findings highlight questions surrounding the case for tort reform that business interests make before Congress and state legislatures. According to Dain Donelson, professor of accounting at Tippie College of Business, businesses want to make frivolous lawsuit attempts against them difficult, because it damages their reputation and unfairly lowers their firm value.
Mr. Donelson examined 229 companies listed among Fortune’s most admired that were sued between 1995 and 2012. Long-term reputational damage was nonexistent where the suit was dismissed as non-meritorious or settled for a small nuisance amount.
According to Mr. Donelson, a business’s reputation takes a stronger hit when the suit is meritorious, leading to drops in stock prices and cost of equity and debt, and other financial factors.
More often than not, these cases are dismissed 70% of the time because of quick settlements and non-meritorious status, which means most lawsuits will not cause long-term damage.
While there is a temptation for policymakers to place limits on fraud complaints due to their proclivity for dismissal, Mr. Donelson said doing so to prevent reputational damage is not a legitimate reason.
Mr. Donelson’s study, “The Merits of Securities Litigation and Corporate Reputation,” was published in the current issue of Contemporary Accounting Research.
