TY - JOUR
T1 - Shades of grey
T2 - risk-related agency conflicts and corporate innovation
AU - Islam, Emdad
AU - Rahman, Lubna
N1 - Funding Information:
We would like to thank Tracy Wang (the editor) and an anonymous referee for helpful comments on earlier versions of the paper. We acknowledge the New Academic Staff Grants from Monash Business School. We also thank Taher Jamil and Brooke Peel for excellent research assistance and Blake Loriot for independently replicating the baseline results of the study. All errors are ours.
Publisher Copyright:
© 2023
PY - 2023/12
Y1 - 2023/12
N2 - We investigate how risk-related agency conflicts affect valuable risky investments. Using an exogenous negative shock to shareholders' litigation rights from an unanticipated court ruling that exacerbates risk-related agency conflicts by shielding managers from shareholders' governance through litigation, we show that innovation inputs and quality decline significantly for treated firms. Small firms lacking counteracting governance mechanisms, such as institutional investors, suffer significantly, while large firms with high institutional investments emerge unscathed. Our results are consistent with theories that predict managerial incentives for ‘playing safe’ lead to value-destroying and risk-reducing actions, especially when counteracting incentive mechanisms are muted.
AB - We investigate how risk-related agency conflicts affect valuable risky investments. Using an exogenous negative shock to shareholders' litigation rights from an unanticipated court ruling that exacerbates risk-related agency conflicts by shielding managers from shareholders' governance through litigation, we show that innovation inputs and quality decline significantly for treated firms. Small firms lacking counteracting governance mechanisms, such as institutional investors, suffer significantly, while large firms with high institutional investments emerge unscathed. Our results are consistent with theories that predict managerial incentives for ‘playing safe’ lead to value-destroying and risk-reducing actions, especially when counteracting incentive mechanisms are muted.
KW - Innovation
KW - Institutional investors
KW - Litigation rights
KW - R&D
KW - Risk-related agency conflicts
KW - Shareholders' governance
UR - http://www.scopus.com/inward/record.url?scp=85172198944&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2023.102475
DO - 10.1016/j.jcorpfin.2023.102475
M3 - Article
AN - SCOPUS:85172198944
SN - 0929-1199
VL - 83
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
M1 - 102475
ER -