Capital Structure as a Strategic Negotiating Tool: Evidence from Shareholders’ Class Action Lawsuits

48 Pages Posted: 4 Dec 2014

Date Written: September 13, 2014

Abstract

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

Sandy, Shastri, Capital Structure as a Strategic Negotiating Tool: Evidence from Shareholders’ Class Action Lawsuits (September 13, 2014). Available at SSRN: https://ssrn.com/abstract=2533256 or http://dx.doi.org/10.2139/ssrn.2533256

Shastri Sandy (Contact Author)

The Brattle Group ( email )

44 Brattle St
Cambridge, MA MA 02138
United States
312-315-8395 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
42
Abstract Views
339
PlumX Metrics