Robustness of Judicial Decisions to Valuation-Method Innovation: An Exploratory Empirical Study

Abstract

In shareholder litigation, judges and litigants choose from a menu of valuation methods that is evolving over time. What drives demand for new valuation methods? Does valuation method choice affect a judge’s final appraisal? Is a judge more likely to favor the litigant whose valuation method coincides with the judge’s if the other litigant uses a different method? Using a comprehensive hand-collected sample of Delaware appraisal remedy shareholder litigation cases, we show that the distribution of judicial appraisal outcomes is insensitive to valuation methodology. Moreover, valuation method agreement between judge and plaintiff (or between judge and defendant) does not influence the judge’s appraisal. In this sense, judicial valuation is robust to innovations in valuation technology. However, we find that judicial valuation method choice is contextual. The method a judge chooses depends on the fundamental attributes of the firm as well as the quality of litigants’ proposed valuation estimates. We conclude that judges demand new valuation methods when the new methods are contextually more appropriate.

Keywords: judicial valuation, shareholder litigation, law and finance

JEL Classification: G10, G14, G38, K12, K22, K40, K41, M41, N20