The Dark Side of Shareholder Litigation: Evidence from Corporate Takeovers

55 Pages Posted: 12 Apr 2015 Last revised: 13 Apr 2020

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Yijia (Eddie) Zhao

University of Massachusetts Boston - College of Management

Date Written: April 13, 2020

Abstract

Exploiting staggered adoption of the universal demand (UD) laws by 23 states between 1989 and 2005 that makes filing shareholder derivative litigations more difficult, we show that reduced litigation threats improve corporate takeover efficiency. Using a difference-in-differences approach, we find that acquirers experience higher announcement returns and better postmerger operating performance after the UD laws. Further analysis suggests that acquirers make suboptimal merger decisions to avoid litigation. Taken together, we show that litigation risk can distort managers’ incentives and destroy value ex ante.

Keywords: Derivative Litigation, Mergers and Acquisitions, Acquirer Returns, Value Destruction, Universal Demand Laws

JEL Classification: G30, G34, G38

Suggested Citation

Chu, Yongqiang and Zhao, Yijia, The Dark Side of Shareholder Litigation: Evidence from Corporate Takeovers (April 13, 2020). Available at SSRN: https://ssrn.com/abstract=2593134 or http://dx.doi.org/10.2139/ssrn.2593134

Yongqiang Chu (Contact Author)

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Yijia Zhao

University of Massachusetts Boston - College of Management ( email )

100 Morrissey Blvd.
Boston, MA 02125
United States

HOME PAGE: http://sites.google.com/view/eddie-zhao/home

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