So, Sue Me...If You Can! How Legal Changes Diminishing Managers' Risk of Being Held Liable by Shareholders Affect Firms' Likelihood to Recall Products.

This article investigates how legal changes that reduce managers' exposure to shareholder litigation risk—specifically, the staggered adoption of universal demand (UD) laws across U.S. states—affect publicly listed firms' likelihood to recall products. UD laws require shareholders to first demand that a firm's board take legal action before filing derivative lawsuits, thereby limiting shareholders' ability to sue managers personally for neglecting fiduciary duties. Using a difference-in-differences analysis on data from 1986 to 2018, the study finds that firms incorporated in states adopting UD laws are significantly less likely to issue product recalls, suggesting managerial opportunism driven by diminished litigation risk. This negative effect is attenuated in firms with a customer-focused corporate culture and those with higher institutional ownership, which serve as organizational governance mechanisms constraining self-interested managerial behavior. The study rules out improved product quality as an alternative explanation and highlights implications for legislators, policymakers, shareholders, and consumer advocates regarding the unintended consequences of UD laws on consumer welfare and firm viability.