Does shareholder litigation affect the corporate information environment?

Using the staggered adoption of universal demand (UD) laws, we show that the reduction in shareholder litigation risk deteriorates firms’ stock price informativeness. This reduction in stock price informativeness is due to firms changing the way they invest rather than obfuscating or withholding firm-specific information. Further tests suggest that the reduction in litigation risk is associated with higher investment-price sensitivity and a lower propensity for stock price crashes. Overall, despite causing a deterioration in firms’ information environments, the reduction in litigation risk does not appear to harm shareholder wealth. Our paper offers novel insights into the net economic benefits of shareholder litigation laws.