Shareholder Litigation and Corporate Culture
46 Pages Posted: 15 Jun 2022 Last revised: 18 Jun 2022
Date Written: 2022
We investigate the effect of shareholder litigation risk on corporate culture. We measure corporate culture by a novel machine learning metric following Li et al. (2021). Exploiting exogenous declines in shareholder litigation rights and derivative lawsuit risk following the staggered adoption of Universal Demand (UD) law by the U.S. states, we document that weaker shareholder litigation rights leads to lower corporate culture score for both full sample and matched sample. Moreover, the relationship is more pronounced for firms with legal experts among directors or top executives, and for firms with riskier litigation outlook. We also show that the adoption of UD law weakens corporate culture through the channel of weakened corporate governance. Our findings suggest that the shareholder litigation risk strengthens corporate governance, which in turn improves corporate culture.
Keywords: Corporate Governance; Corporate Culture; Universal Demand Law; Shareholder Litigation Risk
JEL Classification: G34, G38, M14
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