Managerial Litigation Risk and Corporate Investment Efficiency: Evidence from Derivative Lawsuits

50 Pages Posted: 28 Mar 2018 Last revised: 19 Aug 2019

See all articles by Leye Li

Leye Li

UNSW Sydney

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

Jeffrey Coulton

UNSW Business School

Date Written: March 23, 2018

Abstract

We examine the effect of managers’ personal litigation risk on corporate investment efficiency. Exploiting the staggered adoption of universal demand (UD) laws in the United States, we find that the exogenous reduction in litigation risk induced by UD laws leads to lower investment efficiency. Our results are robust to the use of subcomponents of total investment, alternative partitioning variables, and variations in sample composition. We also find that the decrease in investment sensitivity and excessive risk-taking are channels through which the reduced litigation rights lead to less efficient investments. Our results support the notion that weakened shareholder litigation rights lead to more severe agency conflicts and thus less efficient investment decisions. Our study contributes to our understanding of the economic consequences of a variation in managers’ personal litigation risk and the determinants of corporate investment efficiency.

Keywords: Capital investment; Shareholder litigation; Universal demand laws

JEL Classification: G31; K22

Suggested Citation

Li, Leye and Monroe, Gary S. and Coulton, Jeffrey J., Managerial Litigation Risk and Corporate Investment Efficiency: Evidence from Derivative Lawsuits (March 23, 2018). Available at SSRN: https://ssrn.com/abstract=3147435 or http://dx.doi.org/10.2139/ssrn.3147435

Leye Li (Contact Author)

UNSW Sydney ( email )

UNSW Sydney Australia
Sydeney, NSW 2052
Australia

HOME PAGE: http://www.business.unsw.edu.au/our-people/leye-leonard-li

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

Jeffrey J. Coulton

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293855811 (Phone)
+93855925 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
241
Abstract Views
1,054
rank
154,416
PlumX Metrics