Do Shareholders Gain from Their Right to Sue? Evidence from Federal Judge Turnover

Strengthening U.S. shareholders' right to sue a corporation and its executives leads to significant equity value loss. Using exogenous judicial turnover to generate variation in shareholders' right to sue, we establish that only 15% of this loss stems from mechanisms hypothesized by prior literature (e.g., incremental legal expenses for the corporation). Instead, the value reduction is likely due to a worsening of firms' overall governance. Our evidence indicates that worse governance and equity value loss are due to a specific mechanism: stronger shareholders' right to sue impairs the threat of takeovers, and thus reduces the disciplining role of the market.