Incentive contracting in the shadow of litigation risk: Evidence from universal demand laws

被引:0
作者
Humphery-Jenner, Mark [1 ]
Islam, Emdad [2 ]
Nanda, Vikram [3 ]
Rahman, Lubna [2 ]
机构
[1] UNSW Business Sch, Sydney, Australia
[2] Monash Univ, Monash Business Sch, Melbourne, Australia
[3] Univ Texas Dallas, Richardson, TX 75080 USA
关键词
Litigation risk; Universal demand laws; Compensation; Governance; INSTITUTIONAL INVESTORS; MANAGERIAL INCENTIVES; FIRM; OVERCONFIDENCE; COMPENSATION; PREFERENCES; SENSITIVITY; INVESTMENT; REDUCTION; VALUATION;
D O I
10.1016/j.jbankfin.2024.107352
中图分类号
F8 [财政、金融];
学科分类号
0202 ;
摘要
We hypothesize and show that the impact of a regulatory shock depends both on the shock itself and on how firms respond, which can itself depend on the firm's governance attributes. To explore this, we use the staggered passage of Universal Demand (UD) laws, which insulate managers from derivative lawsuits. We find that, on average, firms respond to UD laws by increasing risk-taking incentives (vega), thereby compensating for weaker external discipline, and incentivizing valuable risky investments. Corporate governance, institutional ownership, and CEO power influences the likelihood of adjusting compensation. The firms that do boost vega subsequently experience greater innovation, and a stronger market response to new product announcements. Our results help to reconcile extant findings on the effects of UD laws by showing that the beneficial impact of the laws is conditional on firms' strengthening their CEOs' risk-taking incentives, a choice affected by their latent governance arrangements.
引用
收藏
页数:20
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