Dispute management and relation to price/earnings ratio (P/E)

My post of Dec. 7, 2005 gives the background of a 2003 study performed for the American Arbitration Association (AAA), summarized in the ACC Docket, July/Aug. 2004 at 93. The summary ventured down an interesting tangent, stating that “the price/earnings ratios (often thought of, among other things, as a measure or indicator of stockholder confidence in the management of a company) for the ‘most dispute-wise’ companies averaged 28 percent higher than the mean for all the publicly-held companies in this survey, and 68 percent higher than the mean for companies in the ‘least dispute-wise’ category” (id. at 100).

I find it hard to believe that litigation management approaches so significantly influence market judgments, since litigation spending for large companies rarely exceeds a half percent of revenue. My hunch is that some other, shared factor – perhaps overall quality of management – accounts for this finding.

More fundamentally, would research find a negative correlation between P/E ratios and total legal spending? That is, companies that manage legal costs down manage profitability up.

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