Managerial litigation risk and corporate investment efficiency: Evidence from universal demand laws

Abstract

We examine the effect of managerial litigation risk on corporate investment efficiency. Exploiting the staggered adoption of universal demand (UD) laws in the United States and employing a stacked regression approach, we find that the exogenous reduction in litigation risk induced by UD laws leads to lower investment efficiency. Our results are robust to the use of alternative partitioning variables and variations in sample composition. We also find that the decrease in investment sensitivity and excessive risk-taking are channels through which the reduced litigation rights lead to less efficient investments. Our results support the notion that weakened shareholder litigation rights lead to more severe agency conflicts and thus less efficient investment decisions.