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Is Shareholder Litigation an Effective External Monitoring Device? Evidence from M&As

45 Pages Posted: 12 Dec 2017 Last revised: 16 Dec 2017

Chune Young Chung

Chung-Ang University - College of Business & Economics

Incheol Kim

University of Texas - Rio Grande Valley - College of Business and Entrepreneurship

Monika K. Rabarison

University of Texas - Rio Grande Valley

Date Written: December 7, 2017

Abstract

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

Chung, Chune Young and Kim, Incheol and Rabarison, Monika K., Is Shareholder Litigation an Effective External Monitoring Device? Evidence from M&As (December 7, 2017). 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 - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Monika Rabarison

University of Texas - Rio Grande Valley ( email )

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

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