Capital Structure as a Strategic Negotiating Tool: Evidence from Shareholders’ Class Action Lawsuits
48 Pages Posted: 4 Dec 2014
Date Written: September 13, 2014
I use a negative exogenous shock to the ability to file shareholder initiated class action lawsuits, the passage of the 1995 Private Securities Litigation Reform Act, to test the effect of the probability of being sued on a firm’s capital structure. After the Act’s passage, firms with the highest ex-ante probability of being sued have the largest decline in leverage ratio. The change in leverage is inversely related to the time until the debt matures. These results suggest that managers use capital structure, specifically short-term debt, strategically as a negotiating tool in shareholder initiated class action lawsuits.
Keywords: capital structure, Private Securities Litigation Reform Act, short-term debt, long-term debt
JEL Classification: G14, G18, G32, G34
Suggested Citation: Suggested Citation