How Changes in the Likelihood of Shareholder Litigation Affect M&A Decisions

Evidence shows shareholders’ wealth is protected from self-serving managers, who are often motivated to divert corporate resources, by both internal and external corporate governance mechanisms (Jensen and Meckling, 1976; Fama, 1980; Fama and Jensen, 1983). However, due to high monitoring costs, retail shareholders – unlike institutional investors – cannot prevent potential agency problems. Therefore, filing a securities class action is one of their few ex-post options for recovering loss of wealth (Gillian, 2006). Empirical evidence on agent-shareholder conflict indicates shareholders have used class action lawsuits to express dissatisfaction or to discipline inefficient management.

In 1995, the U.S. Congress passed the … Read more