Shareholder access to manager-biased courts and the monitoring/litigation trade-off


  • I am very grateful to Mathias Dewatripont, Marco Becht, Erik Berglöf, Mike Burkart, Paola Conconi, Mariassunta Giannetti, Sergei Guriev, and two anonymous referees for valuable comments and suggestions, and Ira Kirysheva for excellent research assistance. I also would like to thank seminar participants at ECARES (Université Libre de Bruxelles), Stockholm SITE and SIFR, New Economic School, Universidad de Navarra, BI Norwegian School of Management, and University of Aarhus, workshop participants at Columbia Law School, and participants of the 21st EEA Annual Congress and of the conference in tribute to Jean-Jacques Laffont.


Facilitating access to courts for outside shareholders is often viewed as a remedy against managerial opportunism. My model shows that, when courts are biased toward managers, reducing the barriers to shareholder suits can lower efficiency because it can lead to either excessive litigation or excessive monitoring of managers by shareholders. The latter effect implies that easy shareholder litigation may lead to a greater use of substitute mechanisms of corporate governance rather than more reliance on the judiciary. I also show that easy shareholder access to manager-biased courts leads to the formation of more, rather than less, concentrated ownership structures.