We study the impact of shareholder-initiated litigation risk on a firm's stock price crash risk. Our empirical analysis takes advantage of the staggered adoption of universal demand laws, which led to an exogenous decline in derivative litigation risk. We find that a decline in the threat of derivative litigation reduces crash risk and that information hoarding associated with earnings management is a channel through which litigation risk affects crash risk. The relationship is also moderated by how exposed firms are to the other primary form of shareholder litigation, namely securities class-action lawsuits.
Obaydin, I., Zurbruegg, R., Hossain, M.N., Adhikari, B.K., Elnahas, A., 2021. Shareholder litigation rights and stock price crash risk. Journal of Corporate Finance 66, 101826. https://doi.org/10.1016/j.jcorpfin.2020.101826
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Journal of Corporate Finance