Finance

Accounting

Business

Actuarial science

Accounts receivable

Earnings

Corporate finance

Gene

Cash conversion cycle

Cash flow forecasting

Payment

Accounts payable

Economics

Cash flow

Microeconomics

Profit (economics)

Chemistry

Working capital

Accrual

Biochemistry

Robustness (evolution)

Cost of capital

Managerial Finance

Purpose The purpose of this paper is to understand the association between litigation risk and working capital management. Design/methodology/approach The authors employ four different regression techniques (OLS regressions, regressions with industry and time controls, median regressions, and Fama Macbeth regressions) to study the relation between litigation risk (contemporaneous and lagged measures) and working capital management (cash conversion cycle (CCC) and its components). The authors also conduct numerous robustness tests. Findings The authors find that high-litigation risk firms tend to have longer CCC. Decomposing CCC into days receivable outstanding, days inventory outstanding and days payable outstanding, the authors find that high-litigation risk firms have longer receivable periods, take a longer time to convert inventory to cash and do not pay their suppliers promptly. These results are robust to a series of robustness tests including using an alternate measure of working capital and accounting for firm type (high-tech vs labor intensive). Originality/value This paper contributes in several ways to the litigation and corporate finance literature. The authors identify another determinant of working capital management and document another avenue whereby legal institutions affect short-term financial decision making. The link between litigation risk and working capital management is of interest to the business community, financial economists, management and the investing public.

Litigation risk and working capital