Abstract
This paper examines the role of shareholder litigation rights in corporate governance. For empirical identification, I use the staggered adoption of universal demand (UD) laws at the state-level. UD imposes a significant obstacle to lawsuits alleging breach of fiduciary duty by directors or officers. I find the laws are associated with decreased firm performance and elevated use of governance provisions that are commonly opposed by shareholders (e.g., classified boards). I also document changes to corporate policies (e.g., CEO compensation) that are potentially sensitive to agency conflicts. The results are driven by firms without an existing blockholder, suggesting litigation rights are particularly important when alternative governance mechanisms are weak. Overall, the findings highlight the importance of the deterrence function of litigation and cast doubt on the notion that lawsuits primarily benefit attorneys rather than shareholders.
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