This study examines defendant stock price returns on the day preceding, the day of, and the day following announcements of settlements in various types of litigation from 2009 through 2014. I hypothesized that defendant returns would be significantly positive on the day of and the day following the announcement, regardless of the settlement amount, due to the market’s perception of a decrease in cost and uncertainty associated with litigation. I further hypothesized that defendant returns would not be significantly positive on the day preceding the announcement, because the market presumably should not have had a reason to react. The results of my analysis support my first hypothesis; however, they also show a significant positive market reaction on the day preceding the announcement. This effect is likely due to the leakage of the settlement announcement and suggests future research should consider a larger event window.
