Shareholder litigation rights and corporate cash holdings: Evidence from universal demand laws

Hien T. Nguyen, Hieu V. Phan and Sun, Lingna (Selina)

Journal of Corporate Finance, 2018, vol. 52, issue C, 192-213

Abstract: We exploit the staggered adoption of universal demand (UD) laws, which hinders shareholders’ rights to initiate derivative lawsuits, by 23 states in the United States from 1989-2005 as a quasi-natural experiment to examine the effects of shareholder litigation as a corporate governance mechanism on corporate cash holdings and its implication for shareholder value. We find that reduced derivative lawsuit risk following the passage of UD laws leads to lower level and higher value of cash. Further analysis indicates investment as a channel through which UD laws affect the level and value of cash. Our evidence highlights the dark side of shareholder litigation, which induces firms to pursue a conservative liquidity policy that hampers shareholder value.

Keywords: Universal demand law; Derivative lawsuits; Shareholder litigation; Cash holdings; Value of cash (search for similar items in EconPapers)
JEL-codes: G30 G32 G38 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0929119917307332
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:52:y:2018:i:c:p:192-213

DOI: 10.1016/j.jcorpfin.2018.08.002

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().