The Effects of Independent Director Litigation Risk

57 Pages Posted: 12 Nov 2019 Last revised: 2 Sep 2021

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Elizabeth Tori

Texas A&M University - Department of Accounting

Christopher G. Yust

Texas A&M University

Date Written: October 1, 2019

Abstract

The unexpected In re Investors Bancorp decision in 2017 by the Delaware Supreme Court lowered the liability threshold only for directors in derivative litigation over their own equity grants, increasing their future litigation risk. Investors and firms reacted to the decision. First, Delaware firms experienced significant negative short-window returns, concentrated in high litigation risk firms where equity compensation is most important. Second, Delaware firms responded by increasing the use of director compensation caps, highlighting that they did not pay excessive amounts. Third, Delaware firms with higher abnormal compensation decreased director compensation, while those with lower abnormal compensation did not. Finally, Delaware firms added higher-quality directors to the compensation committee, consistent with concerns about heightened litigation risk for those positions. Notably, these new, higher-quality directors did not accept lower pay, unlike holdover directors who previously served on the committee. Overall, results are consistent with director litigation concerns having a significant effect on shareholder value and firm and director behavior.

Keywords: Director Labor Market; Derivative Litigation; Board Composition; Director Compensation; Litigation Risk; Entire Fairness Standard

JEL Classification: G30, G32, J3, K22, K41, M12, M52

Suggested Citation

Donelson, Dain C. and Tori, Elizabeth and Yust, Christopher G., The Effects of Independent Director Litigation Risk (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3479341 or http://dx.doi.org/10.2139/ssrn.3479341

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Elizabeth Tori

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
139
Abstract Views
1,110
rank
259,386
PlumX Metrics