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Title: Managerial liability and corporate innovation: evidence from a legal shock
Authors: Guan, Yuyan
Zhang, Liandong
Zheng, Liu
Zou, Hong
Keywords: Business::Management
Issue Date: 2021
Source: Guan, Y., Zhang, L., Zheng, L. & Zou, H. (2021). Managerial liability and corporate innovation: evidence from a legal shock. Journal of Corporate Finance, 69, 102022-.
Journal: Journal of Corporate Finance
Abstract: Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), there is limited evidence on how D&O liability affects corporate innovation. We study this question by exploiting Nevada's 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly firms facing higher litigation risk or operating in more innovative industries. The results are driven mainly by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, although holding D&Os liable may be desirable overall, it also entails a cost by discouraging innovation in some firms. Our study has implications for how the litigation environment may influence sustainable growth via innovation.
ISSN: 0929-1199
DOI: 10.1016/j.jcorpfin.2021.102022
Rights: © 2021 Elsevier B.V. All rights reserved. This paper was published in Journal of Corporate Finance and is made available with permission of Elsevier B.V.
Fulltext Permission: embargo_20230907
Fulltext Availability: With Fulltext
Appears in Collections:NBS Journal Articles

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