Disloyal Managers and Shareholders' Wealth

Abstract

A duty of loyalty prohibits fiduciaries from appropriating business opportunities from their companies. Starting in 2000, Delaware, followed by several other states, allowed boards to waive their duty. We show that public firms covered by waiver laws invest less in R&D, produce fewer and less valuable patents, and exhibit abnormally high inventor departures. Remaining innovation activities contribute less to firm value, a fact confirmed by the market reaction when firms reveal their curtailed internal growth opportunities by announcing acquisitions. Consistent with the laws' intent to provide contracting flexibility to emerging firms, we find evidence of positive impacts for small firms. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.