Do Shareholders Gain from Their Right to Sue?

There is consensus among economists that legal protections for investor rights have a positive impact on corporate value. The intuition is that investors are willing to pay a higher price for a firm’s stock when there are laws in place that limit the ability of the firm’s “insiders” (e.g., the CEO) to divert company profits or start self-serving projects.

While the notion is generally accepted that greater protection of shareholders leads to higher equity value, we do not know yet how individual legal rules and institutions contribute to creating value for investors. In our paper, we study the impact of … Read more