Institutional monitoring and litigation risk: Evidence from employee disputes

In this article, we investigate how institutional investors help mitigate business‐related risks in a corporate environment. Using a large sample of employment disputes, litigations, and court cases, we find that institutional investors play a significant role in reducing employment litigation. We o...

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Bibliographic Details
Published in:The Journal of financial research 2021-04, Vol.44 (1), p.81-119
Main Authors: Rayfield, Blake, Unsal, Omer
Format: Article
Language:English
Subjects:
Actions and defenses
Employment
Financial institutions
Institutional investments
Investments
Litigation
Risk management
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Summary:In this article, we investigate how institutional investors help mitigate business‐related risks in a corporate environment. Using a large sample of employment disputes, litigations, and court cases, we find that institutional investors play a significant role in reducing employment litigation. We observe that firms with larger shares of institutional ownership have a lower incidence of employment lawsuits and that long‐term institutional investors are more effective at decreasing employee mistreatment. Our results suggest that institutional investors can improve the employee work environment and help mitigate future employee litigation. The improvement in employee work conditions has been shown to increase a firm's value through increased employee output, reduced litigation, and direct and indirect costs. Our results shed light on the effectiveness of institutional monitoring on a firm's litigation risk.
ISSN:0270-2592
1475-6803
DOI:10.1111/jfir.12235