Recently, I read a news article stating

Indiabulls Housing Finance shares plunges on reports of litigation against company

Why do shares plunge when company finds itself in a litigation process? How does litigation affect the profitability of a firm?

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  • $\begingroup$ Could you clarify please (by editing the question, not a comment). When you ask "how does that effect profitability", what is "that"? Are you asking about the effect of litigation or the effect of shares plunging? $\endgroup$ – Adam Bailey Sep 9 '19 at 9:58
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    $\begingroup$ @AdamBailey Thank you so much for helping me to refine the question. my apologies for making it harder for you to help me. I'll clarify here - I meant how does litigation affects the profitability of a firm because expectations of profits are what drive value of shares of a firm so when shares plunge on finding firm to be involved in litigation, how does that really add up? $\endgroup$ – Varun Singh Sep 9 '19 at 15:30

Litigation implies that the company may lose money if it loses the lawsuit. The expected loss decreases the expected profits of the firm, and thus negatively affects the share price.

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  • $\begingroup$ Thank you, Kent. However, I would like a favor from you which is to review what I thought before I read your answer. It goes - Litigation news negatively affect investors confidence so those who want to sell their shares increase and simultaneously demand for its shares decreases so with Increase in supply and decrease in demand, shares prices fall. Please let me know if there is any wrong in this argument. Thanks again, Kent! $\endgroup$ – Varun Singh Sep 8 '19 at 22:33
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    $\begingroup$ Sounds good to me. $\endgroup$ – Kent Shikama Sep 9 '19 at 19:12

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