Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law

Posted: 30 Nov 2012 Last revised: 3 Nov 2015

Date Written: February 1, 2014


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

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, Vol 57 (3), pp 747-780, August 2014, Available at SSRN: or

Dain C. Donelson (Contact Author)

University of Iowa ( email )

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

Christopher G. Yust

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)


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