CEO Networks and Shareholder Litigation

46 Pages Posted: 23 Oct 2019

See all articles by William R. McCumber

William R. McCumber

College of Business, Louisiana Tech University

Lingna Sun

Louisiana Tech University

Date Written: October 14, 2019

Abstract

This paper documents that firms led by Chief Executive Officers (CEOs) with greater network power and influence are more likely to be subject to securities class action (SCA) lawsuits, and that these lawsuits are more likely to led by institutional investors. Firms with more connected CEOs are more likely to have their firms’ cases dismissed, or, subject to the suit surviving a motion to dismiss, have lower settlement amounts than firms whose CEOs are less connected. The suits appear to be an alternative method of governance in that defendant firms with highly central CEOs are more likely to replace the CEO and increase the independence of the board in the years following the SCA. We find that the market values the suits, regardless of the immediate outcome, as cumulative abnormal returns around the announcement of the suit are highest for firms with highly connected CEOs. Further, CEOs whose firms are subject to SCA alternative governance suffer decreases in network power subsequent to the SCA.

Keywords: executive networks, corporate governance, shareholder litigation, institutional investors

JEL Classification: G34, K41

Suggested Citation

McCumber, William R. and Sun, Lingna, CEO Networks and Shareholder Litigation (October 14, 2019). Available at SSRN: https://ssrn.com/abstract=3469794 or http://dx.doi.org/10.2139/ssrn.3469794

William R. McCumber (Contact Author)

College of Business, Louisiana Tech University ( email )

COBB 209
P.O. Box 10318
Ruston, LA 71272
United States
318-257-2389 (Phone)
318-257-4253 (Fax)

Lingna Sun

Louisiana Tech University ( email )

502 W Texas Ave
Ruston
Ruston, MA Ruston 71272
United States
4012631683 (Phone)
71270 (Fax)

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