Sunday, December 2, 2012
Litigation Risk and Agency Costs: Evidence from Nevada Corporate Law, by Dain C. Donelson, University of Texas at Austin - McCombs School of Business, and Christopher G. Yust, University of Texas at Austin - McCombs School of Business, was recently posted on SSRN. Here is the abstract:
In 2001, Nevada significantly limited the personal legal liability of corporate officers and directors. We use this exogenous shock to examine the impact of officer and director litigation risk on agency costs. Specifically, we examine changes in firm value, operating performance and CEO compensation. We find that this change adversely affected firm value, especially for firms with the highest expected agency costs. In addition, we find an adverse impact on operating performance and lower CEO pay-for-performance sensitivity for Nevada firms subsequent to the change. Our findings emphasize that officer and director litigation risk is a powerful and effective governance mechanism.