Shareholder Litigation Risk and Firms’ Choice of External Growth

Chenchen Huang, Neslihan Ozkan, Fangming Xu

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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 languageEnglish
Number of pages77
JournalJournal of Financial and Quantitative Analysis
Early online date11 Mar 2022
DOIs
Publication statusE-pub ahead of print - 11 Mar 2022

Keywords

  • UD laws
  • corporate alliances
  • mergers and acquisitions
  • shareholder litigation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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