The Lawsuit Valuation Problem
How should outstanding legal claims be priced as part of the valuation of a business? This is a question that concerns both private and public companies to an increasing degree as legal liabilities become more commonplace.
When private businesses are being valued in a dispute or transaction, it is important to correctly assess the real economic impact of legal claims on the enterprise value. And where public companies are concerned, senior management may rightly speculate as to the “economic drag” that outstanding litigation is having on the market price of their stock.
Traditional trial expected value approaches to valuing legal claims oversimplify the problem and fail to correctly capture the real economic weight of legal liability. They also provide a poor measure of the legal economic risk to the business. There are several reasons for this, but the most obvious is that 95% of all lawsuits never actually reach court adjudication – making trial expectations an inadequate valuation metric. [More]
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