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When governance fails: Naming directors in class action lawsuits

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  • Crutchley, Claire E.
  • Minnick, Kristina
  • Schorno, Patrick J.

Abstract

This paper examines one type of failure in the governance system, the case where directors do not protect shareholders from securities fraud. We find that shareholders can influence large changes in governance and compensation by targeting the full board of directors, but it is more costly in terms of legal fees. Naming directors in a class action lawsuit based on securities fraud, on average, leads to increases in CEO incentive pay, but decreases in director incentive pay. Additionally, naming directors results in a greater change in board composition. These changes in compensation and corporate governance appear to lead to enhanced performance in the years following the lawsuit.

Suggested Citation

  • Crutchley, Claire E. & Minnick, Kristina & Schorno, Patrick J., 2015. "When governance fails: Naming directors in class action lawsuits," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 81-96.
  • Handle: RePEc:eee:corfin:v:35:y:2015:i:c:p:81-96 DOI: 10.1016/j.jcorpfin.2015.08.008
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    References listed on IDEAS

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    1. repec:eee:jbrese:v:76:y:2017:i:c:p:145-158 is not listed on IDEAS

    More about this item

    Keywords

    Lawsuits; Executive compensation; Corporate governance; Boards; Directors;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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