How Do Lawsuits Affect Stock Prices?

Predicting how stock prices are going to change over time is a difficult game. You might think that a lawsuit could give you a sure bet that the stock's price is going to decrease, but this isn't always the case. How a lawsuit affects stock prices depends on the type of lawsuit, the timing and what else is going on with the company.

Financial Statements

When a lawsuit is pending, executives have no idea how the suit will affect the company's financial future or how much money it may need to pay up if it loses. So companies typically don't include information about pending lawsuits on annual reports, SEC filings or other financial statements. If they do include a mention, it's usually just in a footnote. In these situations, unless the lawsuit is big in the media, the public might not even know about it, so the stock price won't be affected.

Fear Factor

However, there are some situations when a lawsuit gets so much media attention that even if a company buries information about the pending suit in the footnotes of its financial statement, the public will still know about it. These cases are likely to cause a company's stock to take a dive, especially if the company could potentially owe millions. For example, BP's stock fell in September 2012, partially due to fears that a pending January 2013 lawsuit could severely hurt its financial future.

Losing a Lawsuit

Just because a company loses a lawsuit doesn't mean that its stock will necessarily fall. Whether the loss affects its stock depends on how much the company will have to pay on the loss and how much the public cares about the case. In 2010, the Walt Disney Co. lost a lawsuit filed by Celador International based on how it compensated Celador for its intellectual property rights for the show, "Who Wants to Be a Millionaire?" After the decision, shares in Disney stock actually went up by 4 percent. The public really wasn't interested in the lawsuit, so no negative media buzz surfaced to spook investors and hurt the stock.

Winning a Lawsuit

Whether a company is a defendant or a plaintiff, its stock prices will typically go up if it wins a lawsuit. This is especially true if the lawsuit is public and helps solidify the company's future in a particular part of the market. For example, in August 2012, Apple won a lawsuit against Samsung based on patent infringement. Apple's stock price went up almost immediately after the judgment was announced. The win scared off other companies thinking of suing Apple or infringing on its patents, and it also helped pave the way for licensing profits that Apple would make in the future.