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Shareholder litigation and bank risk

Degl'Innocentia, Marta; Fiordelisi, Franco; Song, Wei; Zhou, Si

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Authors

Marta Degl'Innocentia

Franco Fiordelisi

WEI SONG WEI.SONG@NOTTINGHAM.AC.UK
Associate Professor

Si Zhou



Abstract

Does a decrease in shareholder litigation enhance managers’ monitoring efforts by ensuring adequate firm risk management? We explore how state universal demand (UD) laws (which limit shareholder litigation as a mechanism to discipline managers), affect bank holding companies’ (BHCs) risk. Using a difference-in-differences analysis, we show that BHCs reduce their tail risk exposures after the implementation of UD laws, which is achieved by improving loan asset quality. Indeed, BHCs appear to apply stricter contract terms for syndicate loans to risky and opaque borrowers. We also show that UD law implementation leads to changes in BHC board composition by increasing the proportion of outside directors, the number of independent directors in audit committees and the number of independent directors with financial expertise.

Journal Article Type Article
Acceptance Date Oct 17, 2022
Online Publication Date Oct 26, 2022
Publication Date Jan 1, 2023
Deposit Date Oct 18, 2022
Publicly Available Date Apr 27, 2024
Journal Journal of Banking and Finance
Print ISSN 0378-4266
Publisher Elsevier BV
Peer Reviewed Peer Reviewed
Volume 146
Article Number 106707
DOI https://doi.org/10.1016/j.jbankfin.2022.106707
Keywords Economics and Econometrics; Finance
Public URL https://nottingham-repository.worktribe.com/output/12613095
Publisher URL https://www.sciencedirect.com/science/article/abs/pii/S0378426622002874

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