Cash windfalls and agency problem: Evidence from litigation settlement awards

초록

This paper examines how firms’ payout and investment policies respond to exogenous cash windfalls from litigation settlements, focusing on the moderating role of corporate governance. We compare the behaviour of windfall firms–those receiving large litigation settlements–to matched control firms, accounting for cross-sectional heterogeneity in board independence, CEO duality, CEO equity ownership, and blockholder ownership. Our findings indicate that windfall firms with strong governance are more likely to increase shareholder distributions and research and development (R&D) investments. In contrast, firms with weaker governance exhibit signs of the free cash flow problem, allocating windfalls to potentially inefficient capital investments. Market valuation analyses reveal that increases in payouts and R&D by windfall firms enhance future shareholder value, while increases in capital expenditures are penalized by the market. This study provides new evidence on the real effects of legal outcomes on corporate policies, highlighting the role of corporate governance in shaping post-litigation corporate behaviour and ensuring that windfalls are used to enhance shareholder value. © 2026 Investment Analysts Society of South Africa.

키워드