Securities Litigation Environments and Bank Lending: Evidence From the Courts

We use bank loans transacted from 2001 to 2013 and examine how heterogeneous pleading standards in U.S. federal district courts affect bank lending decisions. We find robust evidence that firms headquartered in district court jurisdictions that dismiss more securities lawsuits pay significantly lower interest rates. The effect is stronger when borrowers have less information asymmetry issues and diminishes after the Supreme Court’s Tellabs decision that homogenizes court pleading standards. Our results suggest lenders consider the benefit of high pleading standard in curtailing frivolous lawsuits to outweigh the cost of financial misreporting incentives. Our findings remain robust to court fixed effects.