1 Corporate Investment Under the Cloud of Litigation Benjamin Bennett  Todd Milbourn ‡ Zexi Wang ₤ September 2018 Abstract We study the effect of legal risk on firms’ investment. Using legal risk measures based on the number of litigious words in SEC 10-K filings, we find legal risk reduces investment. Underlying mechanisms include both i) a financing channel, whereby legal risk reduces credit ratings, increases bank loan costs, and decreases borrowing, and ii) an attention channel, whereby legal risk consumes top-management’s attention. Accordingly, we find legal risk has negative effects on firms’ investment efficiency and stock performance. We address endogeneity concerns through a DiD analysis utilizing staggered adoptions of universal demand laws across states. Keywords: Legal risk, Investment, SEC 10-K filing JEL: G30, G31, K20  Fisher School of Business, Ohio State University, 840 Fisher Hall, 2100 Neil Ave, Columbus OH 43210, USA, bennett.210@osu.edu ‡ Olin Business School, Washington University in St. Louis, Campus Box 1133, 1 Brookings Dr, St. Louis, MO 63130, USA, milbourn@wustl.edu ₤ University of Bern, Institute for Financial Management, Engehaldenstrasse 4, CH-3012 Bern, Switzerland, zexi.wang@ifm.unibe.ch We would like to thank Justin Birru, Claudia Custodio, Todd Gormley, Rüdiger Fahlenbrach, Laurent Frésard, Claudio Loderer, Swaminathan Kalpathy, Florian Peters, Philip Valta, Alexander Wagner, and the audience of the workshop at the University of Bern and SFI Research Days 2018 for helpful comments.