Abstract

http://ssrn.com/abstract=2180899
 


 



Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law


Dain C. Donelson


University of Texas at Austin - McCombs School of Business

Christopher G. Yust


University of Texas at Austin - McCombs School of Business

February 1, 2014

Journal of Law and Economics, Forthcoming

Abstract:     
In 2001, Nevada significantly limited the personal legal liability of corporate officers and directors. We use this exogenous shock to implement a differences-in-differences design that examines the impact of officer and director litigation risk on agency costs. We find decreased firm value, especially for firms with lower levels of investor protection and with the highest expected agency costs. We also find that managerial incentives are reduced as measured by lower CEO pay-for-performance sensitivity. Finally, we find an adverse impact on operating performance and increased error-based restatements for Nevada firms subsequent to the change. Our findings emphasize that officer and director litigation risk is an important governance mechanism.

Keywords: Litigation risk, state corporate law, Nevada, agency costs

JEL Classification: M41, G18, G30, G32, G34, G38, K00, K41

Accepted Paper Series


Not Available For Download

Date posted: November 30, 2012 ; Last revised: February 13, 2014

Suggested Citation

Donelson, Dain C. and Yust, Christopher G., Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law (February 1, 2014). Journal of Law and Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2180899 or http://dx.doi.org/10.2139/ssrn.2180899

Contact Information

Dain C. Donelson (Contact Author)
University of Texas at Austin - McCombs School of Business ( email )
Austin, TX 78712
United States
512-232-3733 (Phone)
Christopher G. Yust
University of Texas at Austin - McCombs School of Business ( email )
Austin, TX 78712
United States
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