Shareholder Litigation Rights and Stock Price Crash Risk

43 Pages Posted: 30 Apr 2021

See all articles by Ivan Obaydin

Ivan Obaydin

University of Adelaide - Business School

Ralf Zurbruegg

University of Adelaide; Financial Research Network (FIRN)

Md Noman Hossain

University of Texas Rio Grande Valley (UTRGV)

Binay Adhikari

University of Texas at San Antonio

Ahmed Elnahas

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

Date Written: April 22, 2021

Abstract

We study the impact of shareholder-initiated litigation risk on a firm's stock price crash risk. Our empirical analysis takes advantage of the staggered adoption of universal demand laws, which led to an exogenous decline in derivative litigation risk. We find that a decline in the threat of derivative litigation reduces crash risk and that information hoarding associated with earnings management is a channel through which litigation risk affects crash risk. The relationship is also moderated by how exposed firms are to the other primary form of shareholder litigation, namely securities class-action lawsuits.

Keywords: shareholder litigation risk, derivative lawsuits, universal demand, stock price crash risk, securities class action lawsuits, judge ideology

JEL Classification: G14, G30, G38, K22

Suggested Citation

Obaydin, Ivan and Zurbruegg, Ralf and Hossain, Md Noman and Adhikari, Binay Kumar and Elnahas, Ahmed, Shareholder Litigation Rights and Stock Price Crash Risk (April 22, 2021). Journal of Corporate Finance, Vol. 66, No. 101826, 2021, Available at SSRN: https://ssrn.com/abstract=3832156

Ivan Obaydin

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Ralf Zurbruegg

University of Adelaide ( email )

233 North Terrace
Department of Finance
Adelaide SA 5005
Australia
+61 8 8303 5535 (Phone)
+61 8 8303 4368 (Fax)

Financial Research Network (FIRN)

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

Md Noman Hossain

University of Texas Rio Grande Valley (UTRGV) ( email )

1201 W. University Drive
Edinburg, TX 78541
United States
4094540458 (Phone)
78541 (Fax)

Binay Kumar Adhikari (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
2104585349 (Phone)

Ahmed Elnahas

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

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