Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T15:47:09.511Z Has data issue: false hasContentIssue false
  • English
  • Français

Shareholder Litigation and Corporate Social Responsibility

Published online by Cambridge University Press:  08 April 2022

Steven Freund ,
Nam H. Nguyen  and
Hieu V. Phan Open the ORCID record for Hieu V. Phan [Opens in a new window]
Steven Freund
Affiliation:
University of Massachusetts Lowell Manning School of Business steven_freund@uml.edu
Nam H. Nguyen
Affiliation:
University of Texas Rio Grande Valley Vackar College of Business & Entrepreneurship namhoang.nguyen@utrgv.edu
Hieu V. Phan*
Affiliation:
University of Massachusetts Lowell Manning School of Business
*
hieu_phan@uml.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This research examines the relation between shareholder litigation and corporate social responsibility (CSR). Exploiting exogenous changes in shareholder litigation rights following the staggered adoption of universal demand laws by U.S. states and the Ninth Circuit Court of Appeals’ ruling on securities class action lawsuits, we show that weaker shareholder litigation rights lead to lower CSR scores. Moreover, the relation is stronger for firms facing higher litigation risk, and a decreased CSR score enhances firm value. Our evidence suggests that firms engage in CSR activities partly to reduce shareholder litigation risk ex ante and mitigate its consequences ex post.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 2 , March 2023 , pp. 512 - 542
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are especially grateful to Craig Lewis (the referee), whose comments on the paper substantially improved the exposition and analyses. We also appreciate the helpful comments from Paul Malatesta (the editor). Freund and Phan acknowledge a small research grant of the Donahue Center for Business Ethics & Social Responsibility at the University of Massachusetts Lowell. Any opinions expressed are those of the authors and not those of the Donahue Center for Business Ethics & Social Responsibility.

References

Adhikari, B. K. “Causal Effect of Analyst Following on Corporate Social Responsibility.” Journal of Corporate Finance, 41 (2016), 201–216.CrossRefGoogle Scholar
Albuquerque, R.; Koskinen, Y.; and Zhang, C.. “Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence.” Management Science, 65 (2019), 4451–4469.CrossRefGoogle Scholar
Appel, I. “Governance by Litigation.” SSRN Working Paper No. 2532278 (2019).Google Scholar
Arena, M. “Corporate Litigation and Debt.” Journal of Banking & Finance, 87 (2018), 202–215.Google Scholar
Arena, M., and Julio, B.. “The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy.” Journal of Financial and Quantitative Analysis, 50 (2015), 251–275.CrossRefGoogle Scholar
Atanasov, V.; Ivanov, V.; and Litvak, K.. “Does Reputation Limit Opportunistic Behavior in The VC Industry? Evidence From Litigation Against VCs.” Journal of Finance, 67 (2012), 2215–2246.CrossRefGoogle Scholar
Autore, D.; Hutton, I.; Peterson, D. R.; and Smith, A. H.. “The Effect of Securities Litigation on External Financing.” Journal of Corporate Finance, 27 (2014), 231–250.CrossRefGoogle Scholar
Barnett, M. L.; Hartmann, R.; and Solomon, R. M.. “Have You Been Served? Extending The Relationship Between Corporate Social Responsibility and Lawsuits.” Academy of Management Discoveries, 4 (2018), 109–126.CrossRefGoogle Scholar
Bates, T. W.; Kahle, K. M.; and Stulz, R. M.. “Why Do U.S. Firms Hold So Much More Cash than They Used To?” Journal of Finance, 64 (2009), 1985–2021.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–823.CrossRefGoogle Scholar
Bénabou, R., and Tirole, J.. “Individual and Corporate Social Responsibility.” Economica, 77 (2010), 1–19.CrossRefGoogle Scholar
Boone, A. L.; Fich, E. M.; and Griffin, T.. “Shareholder Litigation and the Information Environment.” SSRN Working Paper No. 3106086 (2019).CrossRefGoogle Scholar
Borisov, A.; Goldman, E.; and Gupta, N.. “The Corporate Value of (Corrupt) Lobbying.” Review of Financial Studies, 29 (2016), 1039–1071.CrossRefGoogle Scholar
Boubakri, N.; El Ghoul, S.; Wang, H.; Guedhami, O.; and Kwok, C. C.. “Cross-Listing and Corporate Social Responsibility.” Journal of Corporate Finance, 41 (2016), 123–138.CrossRefGoogle Scholar
Bourveau, T.; Lou, Y.; and Wang, R.. “Shareholder Litigation and Corporate Disclosure: Evidence from Derivative Lawsuits.” Journal of Accounting Research, 56 (2018), 797–842.CrossRefGoogle Scholar
Breuer, W.; Müller, T.; Rosenbach, D.; and Salzmann, A.. “Corporate Social Responsibility, Investor Protection, and Cost of Equity: A Cross-Country Comparison.” Journal of Banking & Finance, 96 (2018), 34–55.Google Scholar
Byun, S. K., and Oh, J. M.. “Local Corporate Social Responsibility, Media Coverage, and Shareholder Value.” Journal of Banking & Finance, 87 (2018), 68–86.CrossRefGoogle Scholar
Cahan, S. F.; Chen, C.; Chen, L.; and Nguyen, N. H.. “Corporate Social Responsibility and Media Coverage.” Journal of Banking & Finance, 59 (2015), 409–422.CrossRefGoogle Scholar
Cain, M. D.; McKeon, S. B.; and Solomon, S. D.. “Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers.” Journal of Financial Economics, 124 (2017), 464–485.CrossRefGoogle Scholar
Campbell, J. L. “Why Would Corporations Behave in Socially Responsible Ways? An Institutional Theory of Corporate Social Responsibility.” Academy of Management Review, 32 (2007), 946–967.CrossRefGoogle Scholar
Cheng, I. H.; Hong, H.; and Shue, K.. “Do Managers Do Good with Other People’s Money?” NBER Working Paper No. 19432 (2013).CrossRefGoogle Scholar
Cheng, C. A.; Huang, H. H.; Li, Y.; and Lobo, G.. “Institutional Monitoring Through Shareholder Litigation.” Journal of Financial Economics, 95 (2010), 356–383.CrossRefGoogle Scholar
Coffee, J. C. “The Changing Character of Securities Litigation in 2019: Why It’s Time to Draw Some Distinctions.” The CLS Blue Sky Blog (2019), available at http://clsbluesky.law.columbia.edu/2019/01/22/the-changing-character-of-securities-litigation-in-2019-why-its-time-to-draw-some-distinctions/ (accessed Feb. 16, 2020).Google Scholar
Cornaggia, J.; Mao, Y.; Tian, X.; and Wolfe, B.. “Does Banking Competition Affect Innovation?” Journal of Financial Economics, 115 (2015), 189–209.CrossRefGoogle Scholar
Crane, A. D., and Koch, A.. “Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment.” Management Science, 64 (2018), 5–23.CrossRefGoogle Scholar
Davis, K. B. Jr “The Forgotten Derivative Suit.” Vanderbilt Law Review, 61 (2008), 387.Google Scholar
Deng, X.; Kang, J. K.; and Low, B. S.. “Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers.” Journal of Financial Economics, 110 (2013), 87–109.CrossRefGoogle Scholar
Deng, S.; Willis, R. H.; and Xu, L.. “Shareholder Litigation, Reputational Loss, and Bank Loan Contracting.” Journal of Financial and Quantitative Analysis, 49 (2014), 1101–1132.CrossRefGoogle Scholar
Di Giuli, A., and Kostovetsky, L.. “Are Red or Blue Companies More Likely to Go Green? Politics and Corporate Social Responsibility.” Journal of Financial Economics, 111 (2014), 158–180.Google Scholar
Dittmar, A., and Mahrt-Smith, J.. “Corporate Governance and the Value of Cash Holdings.” Journal of Financial Economics, 83 (2007), 599–634.CrossRefGoogle Scholar
Erickson, J. “Corporate Governance in the Courtroom: An Empirical Analysis.” William and Mary Law Review, 51 (2010), 1749–1831.Google Scholar
Fahlenbrach, R.; Low, A.; and Stulz, R. M.. “Why Do Firms Appoint CEOs as Outside Directors?” Journal of Financial Economics, 97 (2010), 12–32.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Taxes, Financing Decisions, and Firm Value.” Journal of Finance, 53 (1998), 819–843.CrossRefGoogle Scholar
Fama, E. F., and Jensen, M. C.. “Separation of Ownership and Control.” Journal of Law and Economics, 26 (1983), 301–325.CrossRefGoogle Scholar
Faulkender, M., and Petersen, M. A.. “Does the Source of Capital Affect Capital Structure?” Review of Financial Studies, 19 (2006), 45–79.CrossRefGoogle Scholar
Fazzari, S.; Hubbard, R. G.; and Petersen, B.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, 1 (1988), 141–206.CrossRefGoogle Scholar
Ferris, S. P.; Jandik, T.; Lawless, R. M.; and Makhija, A.. “Derivative Lawsuits as a Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding Filings.” Journal of Financial and Quantitative Analysis, 42 (2007), 143–165.CrossRefGoogle Scholar
Field, L.; Lowry, M.; Shu, S.. “Does Disclosure Deter or Trigger Litigation?” Journal of Accounting and Economics, 39 (2005), 487–507.CrossRefGoogle Scholar
Flammer, C. “Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach.” Management Science, 61 (2015), 2549–2568.CrossRefGoogle Scholar
Fombrun, C. J.; Gardberg, N. A.; and Barnett, M. L.. “Opportunity Platforms and Safety Nets: Corporate Citizenship and Reputational Risk.” Business and Society Review, 105 (2000), 85–106.CrossRefGoogle Scholar
Freeman, E. R. Strategic Management: A Stakeholder Approach. Cambridge: Cambridge University Press (2010).CrossRefGoogle Scholar
Friedman, M. “The Social Responsibility of Business is to Increase its Profits.” New York Times Magazine, Sept. 13 (1970), 32–33, 122, 124, 126.Google Scholar
Gande, A., and Lewis, C.. “Shareholder-Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers.” Journal of Financial and Quantitative Analysis, 44 (2009), 823–850.CrossRefGoogle Scholar
Ghoul, S.; Guedhami, O.; Kwok, C.; and Mishra, D.. “Does Corporate Social Responsibility Affect the Cost of Capital?” Journal of Banking & Finance, 35 (2011), 2388–2406.CrossRefGoogle Scholar
Godfrey, P. C. “The Relationship Between Corporate Philanthropy and Shareholder Wealth: A Risk Management Perspective.” Academy of Management Review, 30 (2005), 777–798.Google Scholar
Godfrey, P. C.; Merrill, C. B.; and Hansen, J. M.. “The Relationship Between Corporate Social Responsibility and Shareholder Value: An Empirical Test of the Risk Management Hypothesis.” Strategic Management Journal, 30 (2009), 425–445.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.CrossRefGoogle Scholar
Gubler, T.; Larkin, I. and Pierce, L.. “Doing Well by Making Well: The Impact of Corporate Wellness Programs on Employee Productivity.” Management Science, 64 (2018), 4967–4987.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.CrossRefGoogle Scholar
Hainmueller, J. “Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies.” Political Analysis, 20 (2012), 25–46.CrossRefGoogle Scholar
Hong, H.; Kubik, J. D.; and Scheinkman, J. A.. “Financial Constraints on Corporate Goodness.” NBER Working Paper No. w18476 (2012).Google Scholar
Houston, J. F.; Lin, C.; and Xie, W.. “Shareholder Protection and the Cost of Capital.” Journal of Law and Economics, 61 (2018), 677–710.CrossRefGoogle Scholar
Huang, S.; Roychowdhury, S.; and Sletten, E.. “Does Litigation Deter or Encourage Real Earnings Management?” Accounting Review, 95 (2020), 251–278.CrossRefGoogle Scholar
Huseynov, F., and Klamm, B.. “Tax Avoidance, Tax Management and Corporate Social Responsibility.” Journal of Corporate Finance, 18 (2012), 804–827.CrossRefGoogle Scholar
Jo, H., and Harjoto, M. A.. “The Causal Effect of Corporate Governance on Corporate Social Responsibility.” Journal of Business Ethics, 106 (2012), 53–72.CrossRefGoogle Scholar
Jones, T. M. “Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics.” Academy of Management Review, 20 (1995), 404–437.CrossRefGoogle Scholar
Jones, G. H.; Jones, B. H.; and Little, P.. “Reputation as Reservoir: Buffering Against Loss in Times of Economic Crisis.” Corporate Reputation Review, 3 (2000), 21–29.Google Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G. S.. “The Cost to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008), 581–611.CrossRefGoogle Scholar
Kim, Y.; Li, H.; and Li, S.. “Corporate Social Responsibility and Stock Price Crash Risk.” Journal of Banking & Finance, 43 (2014), 1–13.Google Scholar
Kim, I., and Skinner, D. J.. “Measuring Securities Litigation Risk.” Journal of Accounting and Economics, 53 (2012), 290–310.CrossRefGoogle Scholar
Kinney, T. P. “Stockholder Derivative Suits: Demand and Futility where the Board Fails to Stop Wrongdoers.” Marquette Law Review, 78 (1994), 172–189.Google Scholar
Koh, P. S.; Qian, C.; and Wang, H.. “Firm Litigation Risk and the Insurance Value of Corporate Social Performance.” Strategic Management Journal, 35 (2014), 1464–1482.CrossRefGoogle Scholar
Lin, C.; Liu, S.; and Manso, G.. “Shareholder Litigation and Corporate Innovation.” Management Science, 67 (2021), 3321–3984.CrossRefGoogle Scholar
Lins, K. V.; Servaes, H.; and Tamayo, A.. “Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility During the Financial Crisis.” Journal of Finance, 72 (2017), 1785–1824.CrossRefGoogle Scholar
Liu, C.; Cheong, C. S.; and Zurbruegg, R.. “Rhetoric, Reality, and Reputation: Do CSR and Political Lobbying Protect Shareholder Wealth Against Environmental Lawsuits?” Journal of Financial and Quantitative Analysis, 55 (2020), 679–706.CrossRefGoogle Scholar
Martin, J.; Petty, W.; and Wallace, J.. “Shareholder Value Maximization—Is There a Role for Corporate Social Responsibility?” Journal of Applied Corporate Finance, 21 (2009), 110–118.CrossRefGoogle Scholar
Masulis, R. W., and Reza, S. W.. “Agency Problems of Corporate Philanthropy.” Review of Financial Studies, 28 (2014), 592–636.CrossRefGoogle Scholar
Nguyen, P. A.; Kecskés, A.; and Mansi, S.. “Does Corporate Social Responsibility Create Shareholder Value? The Importance of Long-Term Investors.” Journal of Banking & Finance, 112 (2020), 105–217.CrossRefGoogle Scholar
Nguyen, H. T.; Phan, H. V.; and Sun, L. S.. “Shareholder Litigation Rights and Corporate Cash Holdings: Evidence from Universal Demand Laws.” Journal of Corporate Finance, 52 (2018), 192–213.CrossRefGoogle Scholar
Ni, X., and Yin, S.. “Shareholder Litigation Rights and The Cost of Debt: Evidence from Derivative Lawsuits.” Journal of Corporate Finance, 48 (2018), 169–186.CrossRefGoogle Scholar
Pinkowitz, L.; Stulz, R.; and Williamson, R.. “Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross-Country Analysis.” Journal of Finance, 61 (2006), 2725–2751.CrossRefGoogle Scholar
Pritchard, A. C., and Sale, H. A.. “What Counts as Fraud? An Empirical Study of Motion to Dismiss Under the Private Securities Litigation Reform Act.” Journal of Empirical Legal Studies, 2 (2005), 125–149.CrossRefGoogle Scholar
Schnietz, K.E., and Epstein, M. J.. “Exploring the Financial Value of a Reputation for Corporate Social Responsibility During a Crisis.” Corporate Reputation Review, 7 (2005), 327–345.CrossRefGoogle Scholar
Servaes, H., and Tamayo, A.. “The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness.” Management Science, 59 (2013), 1045–1061.CrossRefGoogle Scholar
Swanson, C. B. “Juggling Shareholder Rights and Strike Suits in Derivative Litigation: The ALI Drops the Bell.” Minnesota Law Review, 77 (1993), 1339–1392.Google Scholar
U.S. Chamber Institute for Legal Reform. “Containing the Contagion: Proposals to Reform the Broken Securities Class Action System” (2019), available at https://www.instituteforlegalreform.com/wp-content/uploads/media/Securities-Class-Action-System-Reform-Proposals.pdf (accessed Feb. 16, 2020).Google Scholar
Wang, H., and Qian, C.. “Corporate Philanthropy and Corporate Financial Performance: The Roles of Stakeholder Response and Political Access.” Academy of Management Journal, 54 (2011), 1159–1181.CrossRefGoogle Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.CrossRefGoogle Scholar
Supplementary material: PDF

Freund et al. supplementary material

Online Appendix

Download Freund et al. supplementary material(PDF)
PDF 484.3 KB