Litigation Risk and Institutional Monitoring

51 Pages Posted: 21 Nov 2016 Last revised: 27 Nov 2016

See all articles by Kuntara Pukthuanthong

Kuntara Pukthuanthong

University of Missouri, Columbia

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate

Thomas John Walker

Concordia University, Quebec - Department of Finance

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies

Date Written: November 28, 2016

Abstract

According to the existing literature, institutional investors have a significant impact on the litigation risk of publicly traded companies. This should be particularly true after the Private Securities Litigation Reform Act (PSLRA) of 1995 that encourages institutional investors to serve as lead plaintiffs in securities class actions. Using a large sample of securities class action lawsuits, we distinguish between different types of institutional investors based on their investment horizon and ownership structure and find that both factors significantly affect a firm’s litigation risk. Short-term institutional investors are more likely to monitor firms through ex-post litigation, whereas long-term institutional investors prefer to monitor firms internally. Further, we document a nonlinear relation between the stock ownership of the largest institutional investor and a firm’s litigation risk. In particular, as measures of long-term (short-term) ownership increase, the likelihood of litigation declines (increases). In summary, shareholder litigation may be an effective external monitoring device for short-term investors that serves as a substitute for internal corporate governance mechanisms.

Keywords: Shareholder Litigation, Corporate Governance, Institutional Investors

JEL Classification: G34; K41

Suggested Citation

Pukthuanthong, Kuntara and Turtle, Harry J. and Walker, Thomas John and Wang, Jun, Litigation Risk and Institutional Monitoring (November 28, 2016). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2872515

Kuntara Pukthuanthong (Contact Author)

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Harry J. Turtle

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies ( email )

Social Science Centre
London, Ontario N6A 5C2
Canada

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