CEO Networks and Shareholder Litigation

Abstract

This paper documents that firms led by Chief Executive Officers (CEOs) with greater network power and influence are more likely to be subject to securities class action (SCA) lawsuits, and that these lawsuits are more likely to led by institutional investors. Firms with more connected CEOs are more likely to have their firms’ cases dismissed, or, subject to the suit surviving a motion to dismiss, have lower settlement amounts than firms whose CEOs are less connected. The suits appear to be an alternative method of governance in that defendant firms with highly central CEOs are more likely to replace the CEO and increase the independence of the board in the years following the SCA. We find that the market values the suits, regardless of the immediate outcome, as cumulative abnormal returns around the announcement of the suit are highest for firms with highly connected CEOs. Further, CEOs whose firms are subject to SCA alternative governance suffer decreases in network power subsequent to the SCA.