The Need to Validate Exogenous Shocks: Shareholder Derivative Litigation, Universal Demand Laws and Firm Behavior

67 Pages Posted: 30 Sep 2020 Last revised: 22 Jun 2021

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Laura Kettell

The University of Texas at Austin

John M. McInnis

University of Texas at Austin - Department of Accounting

Sara Toynbee

University of Texas at Austin

Date Written: June 22, 2021

Abstract

Several recent studies argue that the adoption of universal demand (UD) laws represent an exogenous decline in litigation risk by increasing the procedural hurdles associated with shareholder derivative litigation. This study examines how UD laws affect the incidence of derivative litigation risk and related decisions. We show that the adoption of UD laws had no meaningful impact on derivative litigation from 1996-2015. We also find no evidence that UD laws affect aggressive accounting, voluntary disclosure, executive compensation, or corporate governance decisions. Collectively, our findings cast doubt on the validity of using UD laws as an exogenous shock to litigation risk.

Keywords: Derivative Litigation; Universal Demand, Securities Class Actions, Litigation Risk, Financial Reporting, Compensation, Corporate Governance

JEL Classification: K22; K41; M41

Suggested Citation

Donelson, Dain C. and Kettell, Laura and McInnis, John M. and Toynbee, Sara, The Need to Validate Exogenous Shocks: Shareholder Derivative Litigation, Universal Demand Laws and Firm Behavior (March 29, 2021). Available at SSRN: https://ssrn.com/abstract=3677566 or http://dx.doi.org/10.2139/ssrn.3677566

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Laura Kettell

The University of Texas at Austin ( email )

United States

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Sara Toynbee (Contact Author)

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

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