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The need to validate exogenous shocks: Shareholder derivative litigation, universal demand laws and firm behavior

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  • Donelson, Dain C.
  • Kettell, Laura
  • McInnis, John
  • Toynbee, Sara

Abstract

Several recent studies argue that the adoption of universal demand (UD) laws represent an exogenous decline in litigation risk by increasing the procedural hurdles associated with shareholder derivative litigation. This study examines how UD laws affect the incidence of derivative litigation risk and related decisions. We show that the adoption of UD laws had no meaningful impact on derivative litigation from 1996 to 2015. We also find no evidence that UD laws affect aggressive accounting, voluntary disclosure, executive compensation, or corporate governance decisions. Collectively, our findings cast doubt on the validity of using UD laws as an exogenous shock to litigation risk.

Suggested Citation

  • Donelson, Dain C. & Kettell, Laura & McInnis, John & Toynbee, Sara, 2022. "The need to validate exogenous shocks: Shareholder derivative litigation, universal demand laws and firm behavior," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    • Handle: RePEc:eee:jaecon:v:73:y:2022:i:1:s0165410121000422
    DOI: 10.1016/j.jacceco.2021.101427
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    Cited by:

    1. Xiaomeng Chen & Meiting Lu & Yaowen Shan & Yizhou Zhang, 2023. "Securities class actions and conditional conservatism: Evidence from two legal events," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2441-2471, June.
    2. Stewart, Christopher R., 2023. "Appraisal rights and corporate disclosure during mergers and acquisitions," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    3. Tommaso Oliviero & Min Park & Hong Zou, 2021. "Liquidity Effects of Litigation Risk: Evidence from a Legal Shock," CSEF Working Papers 623, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 21 Jan 2023.
    4. Feng Chen & Qingyuan Li & Li Xu, 2021. "Universal demand laws and the monitoring demand for accounting conservatism," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1246-1289, July.

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