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Derivative Lawsuits as a Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding Filings

Published online by Cambridge University Press:  06 April 2009

Stephen P. Ferris ,
Tomas Jandik ,
Robert M. Lawless  and
Anil Makhija
Stephen P. Ferris
Affiliation:
[email protected], University of Missouri-Columbia, College of Business, Columbia, MO 65211
Tomas Jandik
Affiliation:
[email protected], University of Arkansas, Walton College of Business, Fayetteville, AR 72701
Robert M. Lawless
Affiliation:
[email protected], University of Illinois, College of Law, Champaign, IL 61820
Anil Makhija
Affiliation:
[email protected], Ohio State University, Fisher College of Business, Columbus, OH 43210
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Abstract

Legal rights of investors are recognized as an essential component of corporate governance. We assess the efficacy of these rights by examining board changes surrounding the filings of shareholder derivative lawsuits. We find that the incidence of derivative lawsuits is higher for firms with a greater likelihood of agency conflicts. We also find that derivative lawsuits are associated with significant improvements in the boards of directors. In particular, the proportion of outside representation on the board of directors increases. There is also some evidence that other board characteristics change favorably. These findings suggest that shareholder derivative lawsuits are not frivolous as is often claimed, but rather that they can serve as an effective corporate governance mechanism.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 1 , March 2007 , pp. 143 - 165
Copyright
Copyright © School of Business Administration, University of Washington 2007

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