Abstract

This paper empirically examines whether CEO equity incentives as well as other corporate governance mechanisms are related to the incidence of shareholder litigation. Our study differs from previous studies, which have largely focused on seasoned firms, by examining how CEO incentives at a firm's pre-IPO stage affect the incidence of IPO-related shareholder litigation. We examine a sample of 81 U.S. IPO firms (issued between 1997 and 2007) that are sued under Section 11 of the 1933 Securities Act within 3 years of their IPO and an industry-size-year matched sample of 81 control firms. We have assembled a novel, hand-collected data set that measures the lawsuit, corporate governance, and firm characteristics of these 162 firms. We report a significant positive association between the likelihood of securities fraud allegations and CEO equity incentives, which is consistent with the idea that there is a "dark side" to executive equity incentives. This association is robust to alternative model specifications, sample selection criteria, and estimation methods. In addition, we find that the risk of being sued is higher for firms whose board is dominated by insiders, whose CEOs are older, have a shorter tenure, or who founded the firm.