Litigation threats and analyst recommendations : insights from anti-SLAPP statutes

Abstract

This study examines the impact of litigation threats from their covered firms on sell-side analyst recommendations. I use the staggered enactment of state-level anti-SLAPP statutes, which provide protections from civil liability for “public expression,” to measure the reduction in litigation threats stemming from corporate-initiated defamation lawsuits against analysts. I find that analysts are more inclined to issue negative recommendations (i.e., sell or underperform rating) following the enactment of anti-SLAPP statutes. The effect is more pronounced when litigation is more costly for analysts, when firms have stronger motivations to silence analysts, when analysts possess more negative information, and when regulations better protect analysts. Consequently, after the passage of anti-SLAPP statutes, recommendation downgrades trigger larger market reactions both in the short-run and long-run, and are less predictable based on stock price movements preceding the downgrade date. In addition to that, negative recommendations are more likely to arise from firms with unexpectedly poor financial performance. Finally, additional evidence shows that litigation threats against analysts have spillover chilling effects on other analysts covering public firms in the same industry. Overall, this study provides evidence that litigation threats deter analysts from fulfilling their information role in the capital market, while legal safeguards help alleviate this issue.