Shareholder Litigation Rights and Bank Dividends

Abstract

We use the staggered adoption of Universal Demand (UD) laws, which significantly reduces the shareholder litigation rights of listed banks incorporated in 23 US states during the period from 1989 to 2005, as a quasi-natural experiment to examine the impact of shareholder litigation rights on bank dividends. The results of the difference-in-difference analysis show that weakened shareholder litigation rights lead to an increase in bank dividends. Further, we find that the impact of UD laws is only evident for banks with greater agency conflicts and higher information asymmetry. However, we find no evidence that litigation rights affect banks’ share repurchases.