Shareholder Litigation and the Cost of Bank Loans -- Evidence from a Natural Experiment
University of South Carolina - Moore School of Business
I study how the threat of shareholder litigation affects the cost of bank loans using a natural experiment based on a ruling by the Ninth Circuit Court of Appeals that makes class action shareholder litigation more difficult. I find that increasing the difficulty of securities class action suit decreases loan spreads, and the effect is stronger for firms closer to bankruptcy. The result is consistent with the argument that shareholder litigation can lead to wealth extraction from lenders in bankruptcy. I also find that the ruling increases loan spreads for firms with better credit quality and weaker corporate governance mechanisms, which is consistent with the argument that the threat of shareholder litigation can help discipline managers.
Number of Pages in PDF File: 38
Keywords: Shareholder Litigation, Bank Loan, Class Action, Wealth Extraction, Corporate Governanceworking papers series
Date posted: June 2, 2014 ; Last revised: June 5, 2014
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