Shareholder Litigation Rights and Corporate Acquisitions
41 Pages Posted: 12 Dec 2017 Last revised: 2 Aug 2018
Date Written: May 28, 2018
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: Suggested Citation