A Model of Shareholder Litigation as a Determinant of a Firm's Financial Policies
34 Pages Posted: 27 Jul 2016 Last revised: 17 Nov 2017
Date Written: November 15, 2017
The option to file a lawsuit against an entrepreneur encourages shareholders to fund projects and to retain entrepreneurs. An entrepreneur, at risk of a lawsuit filing, may save cash as a precautionary measure. When cash accumulates and a lawsuit filing does not occur, an entrepreneur increases investment in hopes of superior future performance. But if future performance wanes notwithstanding, shareholders then file a lawsuit against their entrepreneur. When cash is limited, debt may act as an alternative precautionary measure against a lawsuit filing. In summary, shareholder litigation risk can increase cash, investment, and debt.
Keywords: Theoretical Corporate Finance, Shareholder Litigation
JEL Classification: G32, G33, G38, K22, K41
Suggested Citation: Suggested Citation