Shareholder Litigation Rights and Firm Productivity

Abstract

This paper analyzes the impacts of decreased shareholder litigation risk on firm productivity. Shareholder litigation provides shareholders a mechanism to enforce rights and mitigate agency conflicts. We use a staggered state-level adoption of universal demand (UD) laws as an exogenous shock that suppressed the number of shareholder derivative lawsuits. We show that the resulting deterioration in corporate governance, coupled with increased managerial attention, had mixed effects on productivity. Adverse effects resulting from lower litigation risk are primarily observed in firms facing financial constraints and low takeover threats. Conversely, firms with incentivized management achieved a higher productivity growth.

Keywords: shareholder litigation, firm productivity, managerial ability, derivative lawsuit

JEL Classification: D20, G18, K10, K20, K40