Shareholder Litigation Risk and Firms’ Choice of External Growth
Journal of Financial and Quantitative Analysis, Forthcoming
75 Pages Posted: 3 Sep 2021
Date Written: September 1, 2021
We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.
Keywords: shareholder litigation, UD laws, corporate alliances, mergers and acquisitions
JEL Classification: G11, G30, G34
Suggested Citation: Suggested Citation