Buying the Verdict

Abstract

We document evidence that firms systematically increase specialized, locally targeted advertising following the firm being taken to trial in that given location - precisely following initiation of the suit. In particular, we use legal actions brought against publicly traded firms over the 20-year sample period that progress to trial between 1995 and 2014. In terms of magnitude, the increase is sizable: targeted local advertising increases by 23% (t=4.37) following the suit. They focus their advertisement spikes specifically toward jury trials, and in fact specifically toward the most likely jury pool. In addition, along with advertising expenditures, firms significantly increase their charitable contributions targeted toward litigated locations following being sued there. Lastly, we document that these advertising spikes are associated with verdicts, increasing the probability of a favorable outcome.

Keywords: Firm strategic behavior, Litigation, Strategic advertising

JEL Classification: E22, D25, G10, M37