Does Shareholder Litigation Risk Cause Public Firms to Delist? Evidence from Universal Demand Laws

Abstract

The number of listed firms in the U.S. has fallen by half since the late 1990s. Our paper examines whether and to what extent the costs of shareholder litigation have contributed to this trend. Using the staggered adoption of universal demand (UD) laws, we find that the reduction in shareholder litigation risk lowers incidences of firms delisting from stock exchanges. Furthermore, the effect is concentrated among firms facing higher ex ante litigation risk. UD law adoptions also encourage new listings. Overall, our findings suggest that the pressure imposed by shareholder litigation increases the costs of listing.

Keywords: Shareholder litigation, Derivative lawsuit, Stock market listing, Delisting, New Listing

JEL Classification: D04, D22, G30, K22