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Shareholder litigation rights and corporate cash holdings: Evidence from universal demand laws

Author

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  • Nguyen, Hien T.
  • Phan, Hieu V.
  • Sun, Lingna (Selina)

Abstract

We exploit the staggered adoption of universal demand (UD) laws, which hinders shareholders’ rights to initiate derivative lawsuits, by 23 states in the United States from 1989-2005 as a quasi-natural experiment to examine the effects of shareholder litigation as a corporate governance mechanism on corporate cash holdings and its implication for shareholder value. We find that reduced derivative lawsuit risk following the passage of UD laws leads to lower level and higher value of cash. Further analysis indicates investment as a channel through which UD laws affect the level and value of cash. Our evidence highlights the dark side of shareholder litigation, which induces firms to pursue a conservative liquidity policy that hampers shareholder value.

Suggested Citation

  • Nguyen, Hien T. & Phan, Hieu V. & Sun, Lingna (Selina), 2018. "Shareholder litigation rights and corporate cash holdings: Evidence from universal demand laws," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 192-213.
    • Handle: RePEc:eee:corfin:v:52:y:2018:i:c:p:192-213
    DOI: 10.1016/j.jcorpfin.2018.08.002
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    More about this item

    Keywords

    Universal demand law; Derivative lawsuits; Shareholder litigation; Cash holdings; Value of cash;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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