Reductions of external director liability and corporate payout policy

Abstract

This study examines how director-liability-reduction laws affect corporate payout policies using a difference-in-differences analysis of U.S. firms. While these laws had no significant effect on dividend policies, they substantially increased share repurchase activities and total payouts. The effects are stronger for firms with more blockholders and high-technology companies facing greater litigation exposure. Results support the efficiency enhancement hypothesis, suggesting that reduced litigation threats enable directors to pursue value-maximizing strategies rather than excessive conservatism. The findings contribute to understanding how legal reforms affecting board governance influence corporate payout decisions and shareholder distributions.