Green innovation and shareholder litigation rights

Abstract

We rely on the staggered adoption of the Universal Demand Laws, which led to an exogenous decline in derivative litigation risk, as a quasi-natural experiment to explore the relation between shareholder-initiated litigation risk and a firm's green innovation. Consistent with the pressure hypothesis, we show that our difference-in-differences coefficient estimates implying that an exogenous reduction in the threat of derivative litigation economically and significantly reduces a firm's green innovation by 75 %. Making it harder for shareholders to file a lawsuit against top management intensifies agency costs, pressuring managers become more risk-averse and avoid investing in long-term projects such as green innovation.