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Over-hedging in the shadow of weaker litigation threat

Author

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  • Freund, Steven
  • Luu, Nguyen H.
  • Nguyen, Hien T.
  • Phan, Hieu V.
  • Trinh, Lan T.P.

Abstract

Using the staggered adoption of universal demand (UD) laws by U.S. states over the period 1997–2010 as a quasi-natural experiment, we examine the impacts of weakened shareholder litigation rights on corporate financial risk management. We find that firms facing reduced litigation threats post-UD law adoption engage in more currency hedging, coupled with decreases in firm value. The increase in risk management is particularly pronounced for firms with higher pre-existing litigation risk, weaker governance structures, and greater managerial entrenchment. Our evidence suggests that diminished shareholder litigation threat incentivizes managers to over-hedge to protect their own interests rather than maximize shareholder value.

Suggested Citation

  • Freund, Steven & Luu, Nguyen H. & Nguyen, Hien T. & Phan, Hieu V. & Trinh, Lan T.P., 2024. "Over-hedging in the shadow of weaker litigation threat," Finance Research Letters, Elsevier, vol. 69(PB).
  • Handle: RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324011516
    DOI: 10.1016/j.frl.2024.106122
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    More about this item

    Keywords

    Shareholder litigation; Derivative lawsuits; Universal demand law; Foreign exchange; Currency hedging;
    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

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