Lawsuit Outcomes and the Deep Pockets of Big Four audit firms

It is often argued that Big Four firms have deep pockets, which provide substantial compensation to investors in the event of litigation. However, prior litigation research fails to find consistent evidence supporting the deep pockets argument. Different from prior research, we separately model both the dollar size of the payout to the plaintiff and the probability of a payout. We predict that, in a deep pockets action, the dollar size of the payout is relatively large whereas the payout probability is relatively small. Consistent with these predictions, we find that payouts are significantly larger when Big Four firms are sued but the payout probabilities are significantly smaller. We conclude that deep pockets lawsuits have lottery-like characteristics, in the sense that the dollar payouts are large but the payout probabilities are small.