Q2. What have the authors contributed in "Shareholder litigation rights and capital structure decisions" ?
The authors exploit the staggered adoption of the universal demand ( UD ) laws across U. S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms.
Q3. What is the effect of UD laws on financial leverage?
To the extent that the passage of UD laws impedes shareholders’ derivative lawsuits, thereby reducing litigation risk while increasing the cost of debt, firms might be motivated to decrease financial leverage.
Q4. What is the effect of UD laws on the firm’s financial leverage?
21 Facing shareholder litigation risk, firms may maintain financial leverage below the optimallevels, thus, lower litigation risk following the adoption of UD laws could motivate firms to increase financial leverage to the optimal levels.
Q5. What are the main reasons why managers are inclined to follow conservative corporate policies?
Since managers’ wealth, reputation, and job security are tied to the firms, they have an inherent interest in following conservative corporate policies to lower their litigation risk exposure.
Q6. What do Nguyen et al. (2018) find?
Nguyen et al. (2018) find that firms decrease cash reserves while increasing investment in risk-increasing but value-enhancing projects following the state adoption of UD laws.
Q7. What is the effect of the randomization process on the relationship between UD laws adoption and financial?
Since the randomization process counterfactually assigns non-adopted states to actual adoption years, it should weaken the positive relation between the UD laws adoption and financial leverage.
Q8. What is the size of the regression sample?
Since Execucomp reports compensation data for managers of only S&P 1500 firms from 1992 and many firms do not report CEO ownership, the regression sample is small.
Q9. What is the effect of the Ninth Circuit ruling on the number of class action lawsuits?
Crane and Koch (2018) report that the number of class action lawsuits in the Ninth Circuit decreased by 43% following the ruling while the number of class action lawsuits increased by 14% in other circuits.
Q10. What is the way to prove that the board rejects the demand?
If the board rejects or does not act upon the demand, shareholder plaintiffs must prove thatdirectors or officers who refuse the demand are not independent and that the rejection is made in bad faith.
Q11. What is the effect of increasing financial leverage on the firm?
Although increasing financial leverage could increase firm value and benefit shareholders,it does not necessarily serve the interest of managers since higher leverage also heightens financial distress and insolvency risk.
Q12. What is the effect of the UD laws adoption on net debt issues?
To ascertain that their results are driven by an increase in firms’ debt financing rather than a decrease in equity value or equity financing, the authors examine the effect of the UD laws adoption on net debt issues.
Q13. What measures of financial constraints are used to ensure the robustness of their results?
To ensure the robustness of their results, the authors employ different measures of financialconstraints including S&P long-term credit ratings (Faulkender and Petersen, 2006), dividend payment (Fazzari et al., 1988), and size-age (SA) index (Hadlock and Pierce, 2010).
Q14. What is the relationship between UD laws and financial leverage?
Since financial leverage is closely related to corporate investments, it is possible that the adoption of UD laws affects both financial leverage and investment simultaneously.
Q15. What is the significance of the coefficients of the interaction between treatment and post?
The results indicate that the coefficients of the interaction between treatment and post are positive and statistically significant in all four columns, which corroborate their finding of an increase in financial leverage following the UD laws adoption.