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| We exploit a U.S. Supreme Court ruling on diversity of citizenship in legal disputes to estimate the contribution of the court system to firm value. In an event study we find that an increase in state court quality from bottom to top tercile is associated with an average increase in equity value of 0.45% or about $8.7 million on the event day. This effect appears to be driven by courts‘ attitude towards businesses more than by their competency and is more pronounced for firms in industries with high litigation risk. We also test whether firms benefit from the ability to steer lawsuits into friendly courts so called forum shopping. We provide evidence that a reduction in firms‘ ability to forum shop decreases firm value whereas a reduction in plaintiffs‘ ability to forum shop increases firm value. We further document that the ruling had significant real effects. Firms which previously stayed out of regions with potentially problematic courts subsequently increased their operations in those regions. Throughout our analysis we exploit a previously unused source of geographic heterogeneity in treatment for U.S. Supreme Court rulings namely varying interpretations of the same laws across different federal circuits so called “circuit splits“. |
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