Does a decrease in shareholder litigation enhance managers’ monitoring efforts by ensuring adequate firm risk management? We explore how state universal demand (UD) laws (which limit shareholder litigation as a mechanism to discipline managers), affect bank holding companies’ (BHCs) risk. Using a difference-in-differences analysis, we show that BHCs reduce their tail risk exposures after the implementation of UD laws, which is achieved by improving loan asset quality. Indeed, BHCs appear to apply stricter contract terms for syndicate loans to risky and opaque borrowers. We also show that UD law implementation leads to changes in BHC board composition by increasing the proportion of outside directors, the number of independent directors in audit committees and the number of independent directors with financial expertise.

Shareholder litigation and bank riskIn: JOURNAL OF BANKING & FINANCE. - ISSN 0378-4266. - 146:(2022 Oct 19), pp. 106707.1-106707.17. [10.1016/j.jbankfin.2022.106707]

Shareholder litigation and bank risk

M. Degl'Innocenti
Primo
;
2022

Abstract

Does a decrease in shareholder litigation enhance managers’ monitoring efforts by ensuring adequate firm risk management? We explore how state universal demand (UD) laws (which limit shareholder litigation as a mechanism to discipline managers), affect bank holding companies’ (BHCs) risk. Using a difference-in-differences analysis, we show that BHCs reduce their tail risk exposures after the implementation of UD laws, which is achieved by improving loan asset quality. Indeed, BHCs appear to apply stricter contract terms for syndicate loans to risky and opaque borrowers. We also show that UD law implementation leads to changes in BHC board composition by increasing the proportion of outside directors, the number of independent directors in audit committees and the number of independent directors with financial expertise.
BHCs; Board of directors; Derivative lawsuits; Lending; Risk; Syndicate loans; Universal demand;
Settore SECS-P/11 - Economia degli Intermediari Finanziari
2023
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/944170
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