Working Papers

Do Shareholders Benefit From Fee-Shifting Bylaws?

With Ashiq Ali

Abstract: In the event of a shareholder lawsuit, fee-shifting bylaws can shift the firm’s legal fees from itself to the suing party if the suing party does not obtain a judgment on the merits that substantially achieves the full remedy sought. These bylaws may help deter non-meritorious lawsuits, but may also undermine shareholders’ use of litigation as a corporate disciplining mechanism. Thus, the net effect of legalizing these bylaws on shareholder wealth is an empirical question. To address this question, we conduct an event study that examines the effects on stock prices of Delaware firms of a Delaware court ruling that legalized such fee-shifting bylaws and of subsequent Delaware legislative events, which resulted in a ban on such bylaws. Our findings suggest that on average Delaware firms’ stocks reacted negatively to the legalization of the bylaws. We further show that stocks of Delaware firms with higher exposure to non-meritorious litigation risk reacted more favorably than the stocks of other Delaware firms to legalizing such fee-shifting bylaws. Our results suggest that on average shareholder wealth decreased when fee-shifting bylaws were legalized. However, there is significant heterogeneity in the effect on shareholders’ wealth depending on firms’ exposure to non-meritorious litigation risk.

Select Presentations: 

• UC Berkeley Law & Economics Workshop (Nathan)

• University of Pennsylvania Law Workshop, Brown Bag (Nathan)

• Northwestern University Causal Inference Workshop (Nathan)