Shareholder Rights and Capital Structure: Evidence from Derivative Lawsuits

46 Pages Posted: 22 Jan 2020

See all articles by Benedikt Downar

Benedikt Downar

Technische Universität München (TUM)

Mario Keiling

Technische Universität München (TUM)

Date Written: December 25, 2019

Abstract

We examine how changes in shareholder rights influence firms’ capital structure. We exploit the staggered passage of Universal Demand (UD) laws in 23 US states over a twenty-year period as an exogenous decrease in shareholder rights. UD laws introduced a significant hurdle for shareholders to file a derivative lawsuit on behalf of the firm. Since litigation by shareholders is a major avenue for enforcing shareholder rights, the passage of UD laws reduces investor protection. Using a difference-in-differences design, we find a higher financial leverage for firms incorporated in states which passed a UD law compared to firms incorporated in states that have no UD law. We also find a lower likelihood of equity financing and a higher likelihood of debt financing following the passage of UD laws. For debt financing, we find that firms tend to use loans, instead of bonds, following the passage of a UD law. Examining the underlying mechanism, we find that the shift from equity to debt financing is attributable to a lower stock market liquidity, caused by more severe agency conflicts between shareholders and managers, which arise due to restrictions in shareholder rights.

Keywords: Universal Demand laws, shareholder rights, shareholder litigation, litigation risk, capital structure, financing decisions

Suggested Citation

Downar, Benedikt and Keiling, Mario, Shareholder Rights and Capital Structure: Evidence from Derivative Lawsuits (December 25, 2019). Available at SSRN: https://ssrn.com/abstract=3511349 or http://dx.doi.org/10.2139/ssrn.3511349

Benedikt Downar (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Mario Keiling

Technische Universität München (TUM)

Arcisstrasse 21
Munich, DE 80333
Germany

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