Shareholder Wealth Effects of Directors' Liability Limitation Provisions

The adoption of liability limitation provisions (LLPs) is associated with insignificant stock price reactions for all firms, but with positive stock price reactions for poorly performing firms. This result is consistent with the hypothesis that the net benefit of LLPs is larger for financially troub...

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Published inJournal of financial and quantitative analysis Vol. 29; no. 3; pp. 481 - 497
Main Authors Brook, Yaron, Rao, Ramesh K. S.
Format Journal Article
LanguageEnglish
Published New York, USA Cambridge University Press 01.09.1994
University of Washington Graduate School of Business Administration
Subjects
Boards of directors
Business structures
Effects
Fiduciary liability
Financial liabilities
Liability
Liability insurance
Limit of liability
Limited liability
Outside directors
Personal liability
Privileges & immunities
Proxy reporting
Proxy statements
Shareholders
Shareholders wealth
Statistical analysis
Statistical significance
Stock prices
Stockholders
Studies
Top management
United States > US
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Summary:The adoption of liability limitation provisions (LLPs) is associated with insignificant stock price reactions for all firms, but with positive stock price reactions for poorly performing firms. This result is consistent with the hypothesis that the net benefit of LLPs is larger for financially troubled firms than for other firms because outside directors are valuable to the distressed firm and LLPs substantially affect experts' expected costs of serving as directors of troubled firms.
Bibliography:Leavey School of Business and Administration, Santa Clara University, Santa Clara, CA 95053, and Graduate School of Business, University of Texas at Austin, Austin, TX 78712, respectively. The comments of Sanjay Bhagat, Keith Brown, James Garven, John Martin, Robert Prentice, Laura Starks, and Robert C. Witt, and conversations with Leslie Levy, Elsa Nad, John M. Nash, Stephanie Rosenfelt, and Ralph Ward were helpful. The suggestions of JFQA Managing Editor Jonathan Karpoff and JFQA Referees Wayne Marr and Michael Weisbach improved the paper considerably. The authors thank Venkat Subramanian for research assistance and the University Research Institute of the University of Texas for a special research grant. Rao acknowledges the support of a research grant from the College of Business, University of Texas at Austin.
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ISSN:0022-1090
1756-6916
DOI:10.2307/2331341