Shareholder Litigation Risk and Firms’ Choice of External Growth

Chenchen Huang; Neslihan Ozkan; Fangming Xu

doi:10.1017/S0022109022000187

Shareholder Litigation Risk and Firms’ Choice of External Growth

Chenchen Huang
, Neslihan Ozkan
, Fangming Xu^*

^*Corresponding author for this work

Bristol Doctoral College

Research output: Contribution to journal › Article (Academic Journal) › peer-review

20 Citations (Scopus)

45 Downloads (Pure)

Abstract

We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

Original language	English
Pages (from-to)	574-614
Number of pages	41
Journal	Journal of Financial and Quantitative Analysis
Volume	58
Issue number	2
Early online date	2 Mar 2022
DOIs	https://doi.org/10.1017/S0022109022000187
Publication status	Published - 1 Mar 2023

Bibliographical note

Funding Information:
We thank Christopher Baum, Andriy Bodnaruk (the referee), Mark Clatworthy, Eliezer Fich, Jarrad Harford (the editor), Tuan Ho, A. Can Inci, Andrew Karolyi, Elisabeth Kempf, Hyunseob Kim, Kirak Kim, Alberto Manconi, Kasper Meisner Nielsen, Manuela Pedio, and Silvina Rubio, and the conference and seminar participants at the 2019 Financial Management Association (FMA) Annual Meeting, the 2019 European Financial Management Association (EFMA) Annual Meeting, the 2019 Young Finance Scholars conference, and the University of Bristol for their insightful comments and suggestions. All errors are our own.

Publisher Copyright:
© 2022 The Author(s).

Research Groups and Themes

AF Corporate Finance

Keywords

shareholder litigation
UD laws
corporate alliances
mergers and acquisitions

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10.1017/S0022109022000187Licence: CC BY

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@article{9b267ae206fd4a9296abadb00a2b910f,

title = "Shareholder Litigation Risk and Firms{\textquoteright} Choice of External Growth",

abstract = "We provide novel evidence showing that shareholder litigation risk influences firms{\textquoteright} choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M\&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M\&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms{\textquoteright} choices of boundary-expanding transactions.",

keywords = "shareholder litigation, UD laws, corporate alliances, mergers and acquisitions",

author = "Chenchen Huang and Neslihan Ozkan and Fangming Xu",

note = "Funding Information: We thank Christopher Baum, Andriy Bodnaruk (the referee), Mark Clatworthy, Eliezer Fich, Jarrad Harford (the editor), Tuan Ho, A. Can Inci, Andrew Karolyi, Elisabeth Kempf, Hyunseob Kim, Kirak Kim, Alberto Manconi, Kasper Meisner Nielsen, Manuela Pedio, and Silvina Rubio, and the conference and seminar participants at the 2019 Financial Management Association (FMA) Annual Meeting, the 2019 European Financial Management Association (EFMA) Annual Meeting, the 2019 Young Finance Scholars conference, and the University of Bristol for their insightful comments and suggestions. All errors are our own. Publisher Copyright: {\textcopyright} 2022 The Author(s).",

year = "2023",

month = mar,

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doi = "10.1017/S0022109022000187",

language = "English",

volume = "58",

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T1 - Shareholder Litigation Risk and Firms’ Choice of External Growth

AU - Huang, Chenchen

AU - Ozkan, Neslihan

AU - Xu, Fangming

N1 - Funding Information: We thank Christopher Baum, Andriy Bodnaruk (the referee), Mark Clatworthy, Eliezer Fich, Jarrad Harford (the editor), Tuan Ho, A. Can Inci, Andrew Karolyi, Elisabeth Kempf, Hyunseob Kim, Kirak Kim, Alberto Manconi, Kasper Meisner Nielsen, Manuela Pedio, and Silvina Rubio, and the conference and seminar participants at the 2019 Financial Management Association (FMA) Annual Meeting, the 2019 European Financial Management Association (EFMA) Annual Meeting, the 2019 Young Finance Scholars conference, and the University of Bristol for their insightful comments and suggestions. All errors are our own. Publisher Copyright: © 2022 The Author(s).

PY - 2023/3/1

Y1 - 2023/3/1

N2 - We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

AB - We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

KW - shareholder litigation

KW - UD laws

KW - corporate alliances

KW - mergers and acquisitions

U2 - 10.1017/S0022109022000187

DO - 10.1017/S0022109022000187

M3 - Article (Academic Journal)

SN - 0022-1090

VL - 58

SP - 574

EP - 614

JO - Journal of Financial and Quantitative Analysis

JF - Journal of Financial and Quantitative Analysis

IS - 2

ER -

Shareholder Litigation Risk and Firms’ Choice of External Growth

Abstract

Bibliographical note

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Keywords

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