Do Shareholders Gain from Their Right to Sue? Evidence from Federal Judge Turnover

66 Pages Posted: 14 Jan 2019 Last revised: 20 Jul 2020

See all articles by Stefano Cassella

Stefano Cassella

Tilburg University- School of Economics and Management

Antonino Emanuele Rizzo

Nova School of Business and Economics

Date Written: May 5, 2020

Abstract

Shareholders' right to sue corporations and managers for breach of securities laws is a controversial investor protection mechanism whose impact on equity value is unclear. Using exogenous variation in courts' ideology concerning the protection of outside shareholders vis-a-vis corporations, we establish that strengthening the right to sue causes equity value loss. The loss only partially stems from mechanisms proposed in prior literature, such as direct and indirect litigation costs. At the same time, a stronger right to sue distorts managers' incentives for corporate disclosure, triggering larger information asymmetries, a higher cost of capital, and hence a reduction in equity value.

Keywords: shareholder litigation, lawsuits, federal courts, judicial ideology, corporate valuation, law and finance, takeover threat, investor protection, deterrence, governance

JEL Classification: G32, G34, G38

Suggested Citation

Cassella, Stefano and Rizzo, Antonino Emanuele, Do Shareholders Gain from Their Right to Sue? Evidence from Federal Judge Turnover (May 5, 2020). Available at SSRN: https://ssrn.com/abstract=3310090 or http://dx.doi.org/10.2139/ssrn.3310090

Stefano Cassella

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Antonino Emanuele Rizzo (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

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