Litigation Risk and Managerial Contracting: Evidence from Universal Demand Laws

60 Pages Posted: 7 May 2020 Last revised: 14 Apr 2022

See all articles by Mark Humphery-Jenner

Mark Humphery-Jenner

University of New South Wales (UNSW); UNSW Business School; Financial Research Network (FIRN)

Emdad Islam

Monash University

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Lubna Rahman

Monash University

Date Written: May 10, 2019

Abstract

How do firms refashion managerial incentives in response to regulations that curb litigation-risk and decrease external discipline? We use staggered passage of Universal Demand (UD) laws that insulate managers from derivative-lawsuits and could, thereby, exacerbate risk-related agency conflicts. Firms respond to UD-laws by increasing risk-taking incentives (vega), compensating for weaker external discipline and incentivizing valuable risky-investments. Incentive shifts are associated with firm governance, as indicated by institutional ownership, product market competition and CEO-power. Firms boosting vega experience greater innovation, more extreme outcomes and stronger market response to new product announcements. Our results help reconcile extant findings on effects of UD-laws.

Keywords: Universal Demand Law, Compensation, Litigation, Corporate Governance

JEL Classification: G34

Suggested Citation

Humphery-Jenner, Mark and Humphery-Jenner, Mark and Islam, Emdad and Nanda, Vikram K. and Rahman, Lubna, Litigation Risk and Managerial Contracting: Evidence from Universal Demand Laws (May 10, 2019). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3574393 or http://dx.doi.org/10.2139/ssrn.3574393

Mark Humphery-Jenner (Contact Author)

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Emdad Islam

Monash University ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Lubna Rahman

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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

Paper statistics

Downloads
53
Abstract Views
794
Rank
559,114
PlumX Metrics