Shareholder Litigation Rights and Corporate Acquisitions

Authors

Chune Young Chung
Incheol Kim, The University of Texas Rio Grande ValleyFollow
Monika K. Rabarison, The University of Texas Rio Grande ValleyFollow
Thomas Y. To
Eliza Wu

Document Type

Article

Publication Date

6-2020

Abstract

We examine the effect of shareholder litigation rights on managers’ acquisition decisions. Our experimental design exploits a U.S. Ninth Circuit Court of Appeals ruling on July 2, 1999 that resulted in a reduction in shareholder class actions. We find that, since the ruling, firms in Ninth Circuit states acquire larger targets. Furthermore, acquirers’ returns are lower in these states, especially for those with weaker corporate governance. Further analysis shows that value destruction is the result of managers’ freedom to conduct empire-building acquisitions using overvalued equity. Overall, our findings indicate the importance of shareholder litigation as an external governance mechanism.

Comments

Original published version available at https://doi.org/10.1016/j.jcorpfin.2020.101599

Recommended Citation

Chung, C.Y., Kim, I., Rabarison, M.K., To, T.Y. and Wu, E., 2020. Shareholder litigation rights and corporate acquisitions. Journal of Corporate Finance, 62, p.101599. https://doi.org/10.1016/j.jcorpfin.2020.101599

Publication Title

Journal of Corporate Finance

DOI

10.1016/j.jcorpfin.2020.101599