The Consequences of Limiting Shareholder Litigation: Evidence from Exclusive Forum Provisions

Abstract

In response to an explosion of shareholder litigation, many firms have adopted exclusive forum provisions which limit lawsuits to courts in a firm’s state of incorporation. This paper examines the consequences of a required venue for shareholder litigation. Provision adopters and firms likely to face litigation experience significant increases in firm value around three exogenous events that confirmed the use of a specified forum. Reduced legal costs and the designation of the domicile court as the sole forum to hear shareholder claims contribute to the increase in firm value. Overall, these findings suggest that a required venue for shareholder litigation benefits firms by eliminating multi-jurisdictional lawsuits and reducing the threat of meritless claims.

Keywords: Shareholder litigation, corporate governance, exclusive forum provision

JEL Classification: G30, G34, K22, K41