Governance by Litigation

Abstract

I examine the effect of shareholder litigation rights on the governance of firms. My empirical strategy exploits the staggered adoption of universal demand (UD) laws, which restrict lawsuits alleging a breach of fiduciary duty by directors or officers. UD is associated with an increase in the use of governance provisions (e.g., classified boards) commonly opposed by shareholders. Evidence suggests that shareholders partially offset this effect via non-binding proposals. However, UD is associated with weaker operating performance, particularly for firms without an existing blockholder. Overall, my findings highlight a complementary relationship between shareholder litigation and alternative governance mechanisms.