Shareholder Litigation Risk and Stock Price Crash Risk

Abstract

Exploiting the staggered adoption of universal demand laws (UD Laws) in the United States as a quasi-natural experiment, I study the causal effect of shareholder derivative litigation risk on the firm-specific stock price crash risk. The UD Laws adoption has decreased the managerial litigation risk from the shareholder significantly. Using a large sample of US-listed firms over the period of 1996-2007, I find that after the adoption of UD Laws, firms’ stock price crash risk decreases significantly compared to control firms. Results from Path analysis further suggest that the adoption of UD Laws affects the stock price crash risk through curbing managers’ bad news hoarding behaviors. I also find that the effect is more pronounced when the ex-ante information environment is worse, proxied by the number of analysts following the firm, firms’ financial reporting opacity and the analyst EPS forecast dispersion, which strengthens the argument that the UD Laws adoption affects stock price crash risk by restricting managers’ bad news hoarding. The effect is also moderated by firms’ exposure to the other substitutional form of shareholder litigation, class-action lawsuits. Lastly, the results are robust to a battery of robustness checks. This paper contributes to the literature associated with litigation risk and stock price crash risk. It also has regulatory implications for regulators and lawmakers.

Date of Award	18 Jun 2021
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Yuyan GUAN (Supervisor)