Is Shareholder Litigation an Effective External Monitoring Device? Evidence from M&As
45 Pages Posted: 12 Dec 2017 Last revised: 5 Mar 2018
Date Written: January 2, 2018
The July 2, 1999 Ninth Circuit Court’s ruling requires applying shareholder litigation standards more rigorously. Exploiting this ruling as a quasi-natural experiment, we examine how changes in the likelihood of shareholder litigation affect merger and acquisition decisions. We find, on average, only acquiring firms headquartered in the Ninth Circuit Court’s jurisdiction with public targets present after the ruling 1.7 percentage points lower announcement returns than firms in other states. These firms are also more likely to acquire large targets with stocks, especially with lower institutional ownership. Overall, our results indicate the importance of shareholder litigation as an external governance mechanism.
Keywords: Shareholder Litigation, Litigation Cost, Agency Problem, Mergers and Acquisitions, Empire Building
JEL Classification: G32, G34, K22
Suggested Citation: Suggested Citation