Tuesday, March 2, 2021
We study the role of competition in customers' reactions to filings of class action lawsuits against firms. We measure visits to retail outlets using aggregated and anonymized mobile phone data covering approximately 10% of all mobile devices in the United States. The filing of a class action lawsuit results on average in 4% temporary reduction in customer visits to the target firm's outlets. The effect is strongly dependent on competition. Outlets facing more competition experience significantly larger negative effects. The effect of competition differs across geographic and industry proximity. Close peers, as measured by industry codes, have the largest effect, while geographically both very local (ZIP code-level) competition as well as state-level competition seem to matter. The announcement returns of class action lawsuits similarly depend on competition, with firms facing more competition experiencing more negative returns. Using quarterly accounting revenues and a comprehensive sample of class action lawsuits yields similar results, with firms in more competitive industries experiencing larger reductions in revenue following the filing of class action lawsuits. Our results suggest that competition is an important component in customers' ability to discipline firms for misbehavior.