Shareholder Litigation and Bank Risk

Does a decrease in shareholder litigation enhance managers’ monitoring efforts by ensuring adequate firm risk management? We explore how state universal demand (UD) laws (which limit shareholder litigation as a mechanism to discipline managers), affect bank holding companies’ (BHCs) risk. Using a difference-in-differences analysis, we show that BHCs reduce their tail risk exposures after the implementation of UD laws, which is achieved by improving loan asset quality. Indeed, BHCs appear to apply stricter contract terms for syndicate loans to risky and opaque borrowers. We also show that UD law implementation leads to changes in BHC board composition by increasing the proportion of outside directors, the number of independent directors in audit committees and the number of independent directors with financial expertise.

Keywords: Derivative lawsuits, Universal demand, BHCs, Risk, Lending, Syndicate loans, Board of directors

JEL Classification: G18, G21, G28

Suggested Citation: Suggested Citation

Degl'Innocenti, Marta and Degl'Innocenti, Marta and Fiordelisi, Franco and Song, Wei and Zhou, Si, Shareholder Litigation and Bank Risk (October 18, 2022). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3917337 or http://dx.doi.org/10.2139/ssrn.3917337