Do Shareholders Gain from Their Right to Sue? Evidence from Federal Judge Turnover
66 Pages Posted: 14 Jan 2019 Last revised: 20 Jul 2020
Date Written: May 5, 2020
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: Suggested Citation