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.