Shareholder litigation risk and stock returns

Abstract

Examining the staggered adoption of universal demand (UD) laws as an exogenous shock to shareholder litigation risk, we show that firms have lower stock returns following that adoption in a difference-in-differences (DID) design and Fama and MacBeth (1973) regression. Sorting stocks into UD laws portfolios, we show that firms adopting UD laws earn lower risk-adjusted returns than those who do not. Further, the relation between UD laws and returns is more pronounced when firms face financial constraints, CEOs engage in high risk taking, or takeover protection is low.