Shareholder Litigation Rights and Bond At-Issue Yield Spreads: Evidence from the Adoption of Universal Demand Laws

Shareholder Litigation Rights and Bond At-Issue Yield Spreads: Evidence from the Adoption of Universal Demand Laws

• Hao Shen, Stuart Management Science Ph.D. student
• Professor of Finance Haizhi Wang

Abstract:

We treat the staggered adoption of universal demand (UD) laws by different states in the United States as a quasi-experimental setting, and investigate the effect of UD laws on bond yield spreads at issuance. The adoption of UD laws raises the hurdle for shareholders to bring derivate lawsuits against firms and weakens shareholder litigation rights. Using a sample of bond issuances from 1985 to 2009, we find that the adoption of UD laws is positively associated with yield spreads of bonds issued by U.S. firms. Further, we support two mechanisms through which UD law adoption influences bondholders: managerial preference for the quiet life and deteriorated quality of disclosure information. Overall, our findings indicate that bond investors perceive weakened shareholder litigation rights as a risk to issuing firms and demand a premium to the increased risk exposure due to the adoption of UD laws.

All Illinois Tech faculty, students, and staff are invited to attend.

The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty and students, as well as guest presentations by Illinois Tech colleagues, business professionals, and faculty from other leading business schools.