The Need to Validate Exogenous Shocks: Shareholder Derivative Litigation, Universal Demand Laws and Firm Behavior
61 Pages Posted: 30 Sep 2020 Last revised: 30 Mar 2021
Date Written: March 29, 2021
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. Ultimately, the use of UD laws as exogenous shocks in the accounting and finance literatures appears dubious.
Keywords: Derivative Litigation; Universal Demand, Securities Class Actions, Litigation Risk, Financial Reporting, Compensation, Corporate Governance
JEL Classification: K22; K41; M41
Suggested Citation: Suggested Citation