Abstract
We investigate whether and to what extent shareholder litigation shapes corporate innovation by examining the staggered adoption of universal demand laws in 23 states from 1989 to 2005. These laws impose obstacles against shareholders filing derivative lawsuits, thereby significantly reducing managers’ litigation risk. Using a difference-indifferences design and a matched sample, we find that, following the passage of the laws, firms invested more in research and development, produced more patents in new technological classes and more patents based on new knowledge, generated more patents with significant impacts, and achieved higher patent value. Our findings suggest that the external pressure imposed by shareholder litigation discourages managers from engaging in explorative innovation activities.
| Original language | English |
|---|---|
| Pages (from-to) | 3321-3984 |
| Journal | Management Science |
| Volume | 67 |
| Issue number | 6 |
| Early online date | 5 Oct 2020 |
| DOIs | |
| Publication status | Published - Jun 2021 |
Bibliographical note
The authors thank the Editor (David Simchi-Levi), an Associate Editor, and two anonymous reviewers for very valuable comments. They also thank Ian Appel, Tolga Caskurlu, Ross Levine, Kai Li, David Reeb, Merich Sevilir, Andrei Shleifer, Michael Weisbach, Alminas Zaldokas, and Bohui Zhang as well as the seminar and conference participants at the Western Finance Association Annual Meeting 2018, European Finance Association Conference 2017, Financial Intermediation Research Society 2017, Society for Financial Studies Cavalcade 2017, 2016 Asian Development Bank Institute Finance and Innovation Conference, Berkeley (Haas), Bristol, Chicago Booth, Collegio Carlo Alberto, Federal Reserve Board, Exeter, Irvine, Manchester, Nova School of Business and Economics, Texas A&M, University of California San Diego, the University of Texas at Dallas, Virginia, and Warwick for helpful comments.Keywords
- shareholder litigation
- innovation
- patents
- derivative lawsuit