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Shareholder litigation rights and stock price crash risk

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  • Obaydin, Ivan
  • Zurbruegg, Ralf
  • Hossain, Md Noman
  • Adhikari, Binay Kumar
  • Elnahas, Ahmed

Abstract

We study the impact of shareholder-initiated litigation risk on a firm's stock price crash risk. Our empirical analysis takes advantage of the staggered adoption of universal demand laws, which led to an exogenous decline in derivative litigation risk. We find that a decline in the threat of derivative litigation reduces crash risk and that information hoarding associated with earnings management is a channel through which litigation risk affects crash risk. The relationship is also moderated by how exposed firms are to the other primary form of shareholder litigation, namely securities class-action lawsuits.

Suggested Citation

  • Obaydin, Ivan & Zurbruegg, Ralf & Hossain, Md Noman & Adhikari, Binay Kumar & Elnahas, Ahmed, 2021. "Shareholder litigation rights and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:corfin:v:66:y:2021:i:c:s0929119920302704
    DOI: 10.1016/j.jcorpfin.2020.101826
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    5. Huilin Zhang & Xiaoran Ni & Qi Jin, 2023. "Litigating crashes? Insights from security class actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2935-2963, September.
    6. Liu, Qigui & Tang, Jinghua & Li, Donghui & Xing, Lu, 2023. "The role of bad-news coverage and media environments in crash risk around the world," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 488-509.
    7. Al-Hadi, Ahmed & Habib, Ahsan, 2023. "Consequences of state-level regulations in accounting, finance, and corporate governance: A review," Advances in accounting, Elsevier, vol. 60(C).
    8. Hui Deng & Lingyun Xiong & Lijuan Xiao, 2024. "Does patent infringement litigation affect stock price crash risk? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 3-39, March.
    9. Wongsinhirun, Nopparat & Chatjuthamard, Pattanaporn & Jiraporn, Pornsit & Lee, Sang Mook, 2024. "Customer concentration and shareholder litigation risk: Evidence from a quasi-natural experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    10. Anutchanat Jaroenjitrkam & Sirimon Treepongkaruna & Pornsit Jiraporn, 2022. "Does shareholder litigation risk promote or hinder corporate social responsibility? A quasi‐natural experiment," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(3), pages 657-674, May.
    11. Treepongkaruna, Sirimon & Kyaw, Khine & Jiraporn, Pornsit, 2022. "Shareholder litigation rights and ESG controversies: A quasi-natural experiment," International Review of Financial Analysis, Elsevier, vol. 84(C).
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    14. Liu, Yurou, 2023. "Judicial independence and crash risk: Evidence from a natural experiment in China," Journal of Corporate Finance, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    Shareholder litigation risk; Derivative lawsuits; Universal demand; Stock price crash risk; Securities class action lawsuits; Judge ideology;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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