Shareholder litigation and bank risk

Marta Degl'Innocenti, Franco Fiordelisi, Wei Song and Si Zhou

Journal of Banking & Finance, 2023, vol. 146, issue C

Abstract: Does a decrease in shareholder litigation enhance managers’ monitoring efforts by ensuring adequate firm risk management? We explore how state universal demand (UD) laws (which limit shareholder litigation as a mechanism to discipline managers), affect bank holding companies’ (BHCs) risk. Using a difference-in-differences analysis, we show that BHCs reduce their tail risk exposures after the implementation of UD laws, which is achieved by improving loan asset quality. Indeed, BHCs appear to apply stricter contract terms for syndicate loans to risky and opaque borrowers. We also show that UD law implementation leads to changes in BHC board composition by increasing the proportion of outside directors, the number of independent directors in audit committees and the number of independent directors with financial expertise.

Keywords: Derivative lawsuits; Universal demand; BHCs; Risk; Lending; Syndicate loans; Board of directors (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002874

DOI: 10.1016/j.jbankfin.2022.106707

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