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Director-liability-reduction laws and firm investment

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  • Li, Wei
  • Zhang, Yunyan
  • Zou, Siqian

Abstract

This study examines how an external shock that lowers independent directors’ litigation risk affects firms’ investment behaviour. Exploiting the staggered enactment of Director-Liability-Reduction (DLR) laws across U.S. states between 1986 and 2002, and using a difference-in-differences design, we find that firms’ long-term investment declines following the enactment of DLR laws. We also find that the reduction cannot be explained by financial constraints or by a lack of growth opportunities. Overall, our results suggest that a regulation intended to encourage independent director participation may have unintentionally weakened board effectiveness, leading to curtailed long-horizon investment.

Suggested Citation

  • Li, Wei & Zhang, Yunyan & Zou, Siqian, 2026. "Director-liability-reduction laws and firm investment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:beexfi:v:50:y:2026:i:c:s2214635026000286
    DOI: 10.1016/j.jbef.2026.101166
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