Shareholder Litigation Rights and Corporate Acquisitions

41 Pages Posted: 12 Dec 2017 Last revised: 2 Aug 2018

See all articles by Chune Young Chung

Chune Young Chung

Chung-Ang University - College of Business & Economics

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Monika K. Rabarison

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American)

Thomas To

University of Sydney Business School

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: May 28, 2018

Abstract

We examine the effect of shareholder litigation rights on acquisition decisions using an experimental design that exploits the reduction in litigation threat generated by a U.S. Ninth Circuit Court of Appeals’ ruling. We find that firms in the Ninth Circuit states acquire larger targets and that acquirer returns are lower after the ruling, especially for acquirers with weaker corporate governance. Further analysis shows that the value destruction is due to managers’ freedom to conduct empire-building acquisitions with overvalued equity. Overall, our findings imply that the threat of shareholder litigation significantly reduces managers’ incentives to make self-serving acquisitions.

Keywords: Shareholder litigation, corporate governance, corporate acquisitions, earnings management

JEL Classification: G34, K22, M41

Suggested Citation

Chung, Chune Young and Kim, Incheol and Rabarison, Monika and To, Thomas and Wu, Eliza, Shareholder Litigation Rights and Corporate Acquisitions (May 28, 2018). Available at SSRN: https://ssrn.com/abstract=3086313 or http://dx.doi.org/10.2139/ssrn.3086313

Chune Young Chung

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Incheol Kim (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Monika Rabarison

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Thomas To

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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