Getting rid of a heavy shield: downsizing the in-house legal department?

Abstract

Purpose The purpose of this paper is to examine the effects of the number of lawsuits on firm performance and in-house legal department size. More importantly, this paper also aims to explore the interaction effect of in-house legal department size on the aforementioned lawsuit-performance relationship. Design/methodology/approach The empirical analyses are performed by using secondary data. Structural equation modeling is employed in order to examine multiple structural relationships between the number of lawsuits, size of in-house legal department, and firm performance. Findings Three key findings were generated: number of lawsuits has a significant detrimental effect on firm performance; number of lawsuits is positively associated with size of in-house legal departments; and size of in-house legal departments negatively moderates the relationship between number of lawsuits and firm performance. Practical implications The results corroborate the harmfulness of lawsuits. On the one hand, a large number of lawsuits damage the firm’s financial performance directly; on the other hand, more lawsuits lead to enlarged in-house legal departments which further aggravate the negative effects of lawsuits on firm performance. These results suggest that firms should spend more effort in properly managing legal departments. Originality/value This paper contributes to the literature by empirically examining the economic impacts of lawsuits on firm performance. Moreover, it also explored the notion that having a large size of in-house legal department does not mitigate, but aggravates the harmfulness of lawsuits on firm performance.