Shareholder Litigation Rights and Corporate Acquisitions

Journal of Corporate Finance, Forthcoming

63 Pages Posted: 12 Dec 2017 Last revised: 17 Mar 2020

See all articles by Chune Young Chung

Chune Young Chung

Chung-Ang University - College of Business & Economics

Incheol Kim

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship

Monika K. Rabarison

The University of Texas Rio Grande Valley

Thomas Y. To

University of Sydney Business School

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: January 16, 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.

Keywords: Shareholder litigation, corporate governance, corporate acquisitions

JEL Classification: G34, K22, M41

Suggested Citation

Chung, Chune Young and Kim, Incheol and Rabarison, Monika and To, Thomas Yin and Wu, Eliza, Shareholder Litigation Rights and Corporate Acquisitions (January 16, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3086313 or http://dx.doi.org/10.2139/ssrn.3086313

Chune Young Chung

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Incheol Kim (Contact Author)

University of Texas Rio Grande Valley (UTRGV) (Formerly University of Texas-Pan American) - College of Business and Entrepreneurship ( email )

1201 W University Dr
Edinburg, TX 78539
United States

Monika Rabarison

The University of Texas Rio Grande Valley ( email )

1201 W. University Dr.
Edinburg, TX 78539
United States

Thomas Yin To

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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