Managerial Litigation Risk and Corporate Investment Efficiency: Evidence from Derivative Lawsuits
50 Pages Posted: 28 Mar 2018 Last revised: 19 Aug 2019
Date Written: March 23, 2018
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: Suggested Citation