Shareholder litigation and bank risk

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

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.

Citation

Degl'Innocentia, M., Fiordelisi, F., Song, W., & Zhou, S. (2023). Shareholder litigation and bank risk. Journal of Banking and Finance, 146, Article 106707. https://doi.org/10.1016/j.jbankfin.2022.106707

• 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
• 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