Shareholder Litigation and Corporate Disclosure: Evidence from Derivative Lawsuits
59 Pages Posted: 16 Nov 2017 Last revised: 22 May 2018
Date Written: November 14, 2017
Using the staggered adoption of universal demand (UD) laws in the United States, we study the effect of shareholder litigation risk on corporate disclosure. We find that disclosure significantly increases after UD laws make it more difficult to file derivative lawsuits. Specifically, firms issue more earnings forecasts and voluntary 8-K filings, and increase the length of management discussion and analysis (MD&A) in their 10-K filings. We further assess the direct and indirect channels through which UD laws affect firms’ disclosure policies. We find that the effect of UD laws on corporate disclosure is driven by firms facing relatively higher ex ante derivative litigation risk and higher operating uncertainty, as well as firms for which shareholder litigation is a more important mechanism to discipline managers.
Keywords: Corporate Governance, Derivative Lawsuits, Corporate Disclosure, Shareholder Litigation, Universal Demand Laws
JEL Classification: M41, G10
Suggested Citation: Suggested Citation