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Shareholder Litigation Risk and Firms’ Choice of External Growth

Published online by Cambridge University Press:  11 March 2022

Chenchen Huang ,
Neslihan Ozkan  and
Fangming Xu Open the ORCID record for Fangming Xu [Opens in a new window]
Chenchen Huang
Affiliation:
University of Bristol and University of Southampton chenchen.huang@soton.ac.uk
Neslihan Ozkan
Affiliation:
University of Bristol n.ozkan@bristol.ac.uk
Fangming Xu*
Affiliation:
University of Bristol
*
fangming.xu@bristol.ac.uk (corresponding author)
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Abstract

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We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk and low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 2 , March 2023 , pp. 574 - 614
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), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Christopher Baum, Andriy Bodnaruk (the referee), Mark Clatworthy, Eliezer Fich, Jarrad Harford (the editor), Tuan Ho, A. Can Inci, Andrew Karolyi, Elisabeth Kempf, Hyunseob Kim, Kirak Kim, Alberto Manconi, Kasper Meisner Nielsen, Manuela Pedio, and Silvina Rubio, and the conference and seminar participants at the 2019 Financial Management Association (FMA) Annual Meeting, the 2019 European Financial Management Association (EFMA) Annual Meeting, the 2019 Young Finance Scholars conference, and the University of Bristol for their insightful comments and suggestions. All errors are our own.

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