Over-hedging in the shadow of weaker litigation threat

Steven Freund, Nguyen H. Luu, Hien T. Nguyen, Hieu V. Phan and Lan T.P. Trinh

Finance Research Letters, 2024, vol. 69, issue PB

Abstract: Using the staggered adoption of universal demand (UD) laws by U.S. states over the period 1997–2010 as a quasi-natural experiment, we examine the impacts of weakened shareholder litigation rights on corporate financial risk management. We find that firms facing reduced litigation threats post-UD law adoption engage in more currency hedging, coupled with decreases in firm value. The increase in risk management is particularly pronounced for firms with higher pre-existing litigation risk, weaker governance structures, and greater managerial entrenchment. Our evidence suggests that diminished shareholder litigation threat incentivizes managers to over-hedge to protect their own interests rather than maximize shareholder value.

Keywords: Shareholder litigation; Derivative lawsuits; Universal demand law; Foreign exchange; Currency hedging (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324011516

DOI: 10.1016/j.frl.2024.106122

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