The Dark Side of Shareholder Litigation: Evidence from Corporate Takeovers

Exploiting staggered adoption of universal demand (UD) laws by 23 states between 1989 and 2005 as quasi-natural experiments, we show that reduced shareholder litigation threat improves corporate takeover efficiency. Using a difference-in-differences approach, we find that acquirers incorporated in states that adopted UD laws experience higher announcement returns and better long-run post-merger operating performance. Further analysis shows that acquirers make suboptimal merger decisions to reduce litigation risk.