The Dark Side of Shareholder Litigation: Evidence from Corporate Takeovers
55 Pages Posted: 12 Apr 2015 Last revised: 13 Apr 2020
Date Written: April 13, 2020
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: Suggested Citation