Incentive

Ex-ante

Macroeconomics

Corporate law

Litigation risk analysis

Microeconomics

Accounting

Economics

Computer science

Business

Corporate governance

Physics

Astronomy

Monetary economics

Audit

Value (mathematics)

Great Rift

Finance

Derivative (finance)

Machine learning

Shareholder

Financial Management

Exploiting staggered adoption of the universal demand (UD) laws by 23 states between 1989 and 2005 that makes filing shareholder derivative litigations more difficult, we show that reduced litigation threats improve corporate takeover efficiency. Using a difference‐in‐differences approach, we find that acquirers experience higher announcement returns and better postmerger operating performance after the UD laws. Further analysis suggests that acquirers make suboptimal merger decisions to avoid litigation. Taken together, we show that litigation risk can distort managers’ incentives and destroy value ex ante.

The dark side of shareholder litigation: Evidence from corporate takeovers