Does General Counsel in Top Management Help Firms Reduce Investment Distortion?

This paper examines whether the presence of the General Counsel (GC) in top management mitigates the distortion of investment decisions. We find that establishing the GC position into top management significantly decreases misvaluation-driven investment, suggesting that GC in top management plays a key role in mitigating investment distortion. Next, establishing the GC position in top management and the subsequent change in investment lead to an increase in future stock returns and a decrease in stock return volatility. We further show that GC in top management lowers the likelihood of firms engaging in mispricing-driven M&As, improving M&A efficiency. Finally, GC in top management effectively reduces the likelihood of litigation triggered by aggressive investment. Collectively, our results suggest that, due to its conservative or risk-averse nature to mitigate legal risk, GC in top management plays an important role in enhancing investment quality by preempting mispricing-driven investment.