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Shareholder litigation rights and the cost of debt: Evidence from derivative lawsuits

Xiaoran Ni and Sirui Yin

Journal of Corporate Finance, 2018, vol. 48, issue C, 169-186

Abstract: Exploiting the staggered adoption of universal demand (UD) laws as exogenous shocks to filing derivative lawsuits, we find that weakened shareholder litigation rights cause a significant increase in the cost of debt. Deteriorated corporate governance, increased information asymmetry, and heightened managerial risk-taking are the underlying channels. Shareholders respond to weakened litigation rights by providing managers with less risk-taking incentives. Overall, our findings suggest that the shareholder litigation rights are important to debtholders.

Keywords: Shareholder litigation right; Universal demand law; Cost of debt; Corporate governance (search for similar items in EconPapers)
JEL-codes: G32 G38 K22 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:corfin:v:48:y:2018:i:c:p:169-186