Director–Liability–Reduction Laws and Conditional Conservatism

Basu, Sudipta; Liang, Yi

doi:10.1111/1475-679x.12267

Cited by 64 publications

(39 citation statements)

References 110 publications

(137 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…As such, this manuscript is similar in nature to concurrent work examining shifts in director legal liabilities and conditional conservatism (Basu and Liang 2016), albeit different in that I focus on the risk of litigation filed under federal securities laws, which is the most costly form of shareholder litigation firms face (Coffee 2006 Consider, for instance, that the largest sum that an individual ever paid in with regard to settling a class-action suit was the Chairman of Global Crossing, Gary Winnick, who paid $55 million. However, this was less than 10 percent of the $734 million he earned by selling stock at an inflated level (Morgenson 2005).…”

mentioning

confidence: 85%

Do Securities Class Actions Deter Misreporting?

Hopkins

2018

Contemporary Accting Res

View full text Add to dashboard Cite

This paper investigates whether a U.S. circuit court ruling that made it easier for public corporations to defend against security class actions led to more misreporting. In a difference‐in‐differences framework, I find an increase in restatements for firms affected by the ruling relative to unaffected firms. Furthermore, within affected firms, these results are concentrated among those that experienced the lowest abnormal returns in response to the ruling, the firms most likely to face meritorious litigation, and among those firms that saw decreases (increases) in dedicated (transient) institutional ownership after the ruling. Inferences are similar examining cross‐sectional tests in a levels framework. These results suggest that the threat of shareholder litigation can discipline managerial reporting practices and deter misreporting. As such, this evidence informs the debate about the role of securities class actions in regulating securities markets.

show abstract

mentioning

confidence: 85%

Do Securities Class Actions Deter Misreporting?

Hopkins

2018

Contemporary Accting Res

View full text Add to dashboard Cite

show abstract

“…While studies on D&O insurance are deeply researched, research on DLR is in its infancy. Unlike D&O insurance, DLR coverage is relatively free from third-party monitoring (Basu and Liang, 2019), which allows us to observe its effect more clearly. In this manner, this article contributes to studies on DLR by providing empirical evidence of the positive effect DLR provisions have upon directors' motivation toward innovative projects.…”

Section: Discussionmentioning

confidence: 99%

Can directors' liability reduction promote corporate innovation?

Choi

Jung

2021

View full text Add to dashboard Cite

PurposeThis study aims to explore the effects of director liability reduction (DLR) laws on corporate innovation strategies in South Korea.Design/methodology/approachRegression analysis is used to investigate the effects of the directors' liability reduction coverage on the corporate innovation. The data includes 7,517 firm-year observations spanning from 2011 to 2017.FindingsThe authors provide empirical evidence that directors feel protected by the coverage and are able to focus more on innovative projects. Using research and development expenditure and the number of patents registered to measure the firm's innovation, we find that covered firms spend more on R&D and register more patents than non-covered firms.Originality/valueThis study extends the literature on corporate innovation. A vast amount of literature empirically tests how best to motivate directors to engage in innovative activities. On the same line, this study is the first to empirically test the effect of DLR shelters on directors' motivations toward innovation.

show abstract

“…In addition, between 1986 and 2002, various US states adopted laws to limit nonofficer directors’ legal liabilities in response to the D & O insurance crisis (Romano, 2006). We obtain the data for DL reduction laws from Basu and Liang (2019). Furthermore, a 1991 Delaware court ruling expanded corporate directors’ fiduciary duties to include creditors when a Delaware‐incorporated firm is near insolvency (Aier et al., 2014).…”

Section: Additional Tests and Robustness Checksmentioning

confidence: 99%

Universal demand laws and the monitoring demand for accounting conservatism

Chen

2021

Business Fin & Account

View full text Add to dashboard Cite

While prior research holds the consensus that accounting conservatism can serve as an effective monitoring device, it is not clear whether shareholders can successfully enforce managers’ adherence to accounting conservatism when directors fail to fulfill their fiduciary duties. We attempt to answer the question by exploiting staggered enactments of the universal demand (UD) laws in 23 US states. UD laws raise procedural hurdles for shareholders to file derivative lawsuits against managers and directors who allegedly breach their fiduciary duties. For firms incorporated in states that adopt UD laws, restrictions on shareholder litigation rights weaken directors’ incentives to monitor managers. We predict and find a decrease in conditional conservatism following the enactment of UD laws. The decline in conditional conservatism exists only for firms with low institutional ownership, low external equity dependence, or high ex‐ante derivative lawsuit risk. The main result is attributable to both the direct channel (through restriction of shareholder litigation rights) and the indirect channel (through the deployment of management‐friendly governance provisions). Our findings suggest that shareholders cannot successfully demand accounting conservatism when directors lack the incentives to monitor managers.

show abstract

Director–Liability–Reduction Laws and Conditional Conservatism

Cited by 64 publications

References 110 publications

Do Securities Class Actions Deter Misreporting?

Do Securities Class Actions Deter Misreporting?

Can directors' liability reduction promote corporate innovation?

Universal demand laws and the monitoring demand for accounting conservatism

Contact Info

Product

Resources

About