Shareholder Access to Manager-Biased Courts and the Monitoring/Litigation Tradeoff

CEFIR and NES Working Paper No. 106

34 Pages Posted: 31 Aug 2006

See all articles by Sergey Stepanov

Sergey Stepanov

National Research University Higher School of Economics - Faculty of Economics; National Research University Higher School of Economics - International College of Economics and Finance

Date Written: August 15, 2007

Abstract

Adequate access to courts by minority shareholders is commonly viewed as an important element of a good corporate governance system. Should shareholders be provided with easy access to courts when judges are unlikely to punish opportunistic managers? It might seem that having an extra instrument of protection is always better as long as it provides some protection against managerial self-dealing. We present a model which shows that facilitating shareholder litigation in a system where courts are biased towards managers can actually lower efficiency, as it can lead to either excessive litigation or excessive monitoring of managers by shareholders. The latter effect arises when litigation is very costly for the firm, but cheap for an individual shareholder. In this case, easy litigation does not lead to a greater reliance on the judiciary and results in more, rather than less, concentrated ownership. This is the effect of the optimal adjustment of the ownership structure to an increase in shareholders' willingness to bring suits when courts are manager-biased. Our model implies that removing impediments to shareholder litigation in countries where courts are reluctant to protect shareholders may increase the cost of corporate governance there.

Keywords: corporate governance, shareholder protection, shareholder litigation, monitoring, biased courts

JEL Classification: G32, G34, K41

Suggested Citation

Stepanov, Sergey, Shareholder Access to Manager-Biased Courts and the Monitoring/Litigation Tradeoff (August 15, 2007). CEFIR and NES Working Paper No. 106, Available at SSRN: https://ssrn.com/abstract=927731 or http://dx.doi.org/10.2139/ssrn.927731

Sergey Stepanov (Contact Author)

National Research University Higher School of Economics - Faculty of Economics ( email )

Shabolovka 26
Moscow, 119049
Russia

National Research University Higher School of Economics - International College of Economics and Finance ( email )

Pokrovski Bulvar 11, Korpus Zh, Office 715
Moscow, 109028
Russia

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