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Does Shareholder Litigation Risk Cause Public Firms to Delist? Evidence from Securities Class Action Lawsuits

Published online by Cambridge University Press:  27 April 2023

Jonathan Brogaard ,
Nhan Le ,
Duc Duy Nguyen Open the ORCID record for Duc Duy Nguyen [Opens in a new window]  and
Vathunyoo Sila Open the ORCID record for Vathunyoo Sila [Opens in a new window]
Jonathan Brogaard
Affiliation:
David Eccles School of Business, University of Utah brogaard@eccles.utah.edu
Nhan Le
Affiliation:
Research School of Finance, Actuarial Studies and Statistics, Australian National University nhan.le@anu.edu.au
Duc Duy Nguyen*
Affiliation:
Durham University Business School, Durham University
Vathunyoo Sila
Affiliation:
University of Edinburgh Business School, University of Edinburgh ben.sila@ed.ac.uk
*
duc.d.nguyen@durham.ac.uk (corresponding author)
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Abstract

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Using three exogenous shocks to ex ante litigation risk, including federal judge ideology and two influential judicial precedents, we find that lower shareholder litigation risk reduces a firm’s propensity to delist from the U.S. stock markets. The effect is at least partially driven by indirect costs of litigation and that being a private firm can significantly reduce the threat of litigation. Overall, the results suggest that mitigating excessive litigation costs for public firms is crucial to ensure the continued vibrancy of the U.S. stock market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 4 , June 2024 , pp. 1726 - 1759
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to an anonymous referee, Jiafu An, Mascia Bedendo, Jennifer Conrad (the editor), Alan Crane, Ettore Croci, Craig Doidge, Rawley Heimer (discussant), Mikael Homanen, Dirk Jenter, Elisabeth Kempf, Sandy Klasa, Christian Leuz, Ross Levine, Ivan Lim, Ernst Maug, Paula Suh (discussant), Anh Tran (discussant), Shang-Jin Wei, and seminar participants at Australian National University and the 2019 ICGS and 2019 KAIST conferences for very helpful comments and suggestions. We thank Haoyan Chen and Lukman Hakim for their excellent research assistance. The usual disclaimer applies.

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