Litigating Payouts or Not? Evidence from Universal Demand Laws

49 Pages Posted: 8 Jun 2020 Last revised: 18 Jan 2022

See all articles by Huilin Zhang

Huilin Zhang

Beijing Normal University (BNU) - School of Economics and Business Administration

Sabri Boubaker

EM Normandie

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

Date Written: January 18, 2022

Abstract

Anecdotal evidence suggests that high litigation risk may induce firms to reduce payouts. By comparison, litigation can be an effective governance tool for shareholders to claim payouts. Therefore, it is unclear how litigation risk affects payouts on average. To address this issue, we exploit the staggered adoption of universal demand (UD) laws across various U.S. states as quasi-exogenous shocks. We find that firms increase payouts significantly after UD laws raise the hurdle of filing derivative lawsuits. In particular, the adoption of UD laws discourages the emission of cash dividends and encourages the initiation of share repurchases. The main effect is more pronounced for firms faced with higher litigation risk, which are more financially distressed, and that operate in more competitive product markets. Our overall findings suggest that excessive threats of derivative lawsuits may dampen financial flexibility and deter the distribution of cash to shareholders.

Keywords: Payouts; Derivative Lawsuit; Universal Demand Law; Shareholder Litigation; Corporate Governance

JEL Classification: G35; G32; G38

Suggested Citation

Zhang, Huilin and Boubaker, Sabri and Ni, Xiaoran, Litigating Payouts or Not? Evidence from Universal Demand Laws (January 18, 2022). Available at SSRN: https://ssrn.com/abstract=3598978 or http://dx.doi.org/10.2139/ssrn.3598978

Huilin Zhang

Beijing Normal University (BNU) - School of Economics and Business Administration ( email )

No.19 Xinwai Str
Haidian District
Beijing, 100875
China

Sabri Boubaker

EM Normandie ( email )

France

Xiaoran Ni (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 204, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

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

Paper statistics

Downloads
107
Abstract Views
574
rank
342,664
PlumX Metrics