Institutional monitoring and litigation risk: Evidence from employee disputes

Abstract

In this study, we investigate how institutional investors help mitigate businessrelated 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 of 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.

Which institutional investors drive corporate sustainability? A systematic literature review

“…Specially, pension funds and ESG/CSR performance (Dyck et al, 2019; Kim, Wan, et al, 2019; Oh et al, 2011) or reporting (Garcia‐Sanchez et al, 2020) are positively related. Rayfield and Unsal (2021) found that pension funds moderate the negative link between ownership ratio and employment lawsuits as an inverse measure of social performance. According to Cahan et al (2017), pension funds moderate the positive link between CSR performance and IO, and vice versa.…”

“…Prior studies have found supportive results for this argument. Regarding ESG/CSR, two Indian studies (Manogna & Mishra, 2020; Yadav, 2020) and one US study (Rayfield & Unsal, 2021) stressed a positive impact on mutual funds. According to Rayfield and Unsal (2021), mutual funds moderate the negative link between IO ratio and employment lawsuits as an inverse measure of social performance.…”

“…Regarding ESG/CSR, two Indian studies (Manogna & Mishra, 2020; Yadav, 2020) and one US study (Rayfield & Unsal, 2021) stressed a positive impact on mutual funds. According to Rayfield and Unsal (2021), mutual funds moderate the negative link between IO ratio and employment lawsuits as an inverse measure of social performance. Relying on India as a unique setting with mandatory sustainable corporate governance regulations, mutual funds increase both CSR spending (Manogna & Mishra, 2020) and ESG performance (Yadav, 2020).…”

Green innovation and environmental misconduct

“…Markets are growing increasingly hostile towards firms that produce non-green innovation or actively produce excess greenhouse gases. Firms can experience pressure to produce a more equitable environment from several stakeholders, including state and local governments, consumers, employees (Rayfield and Unsal, 2021) and institutional investors (Cheng et al , 2020).…”

Hometown sentiment: CEO hometown identity and company audit fees

“…Second, institutional investors’ professional business analysis ability and information capturing ability can correct the CEO decision-making bias caused by information asymmetry, effectively restrain the CEO earnings management behavior and weaken the company’s information risk. Finally, the higher the shareholding ratio of institutional investors, the greater the enthusiasm to supervise listed companies and the more likely to take measures to interfere with the company’s violations (Lu et al , 2012), which can reduce the litigation risk (Rayfield and unsal, 2021). In summary, the high shareholding ratio of institutional investors will further promote the inhibitory effect of CEO hometown identity on company’s agency risk, information risk and litigation risk, which in turn reinforces the negative effect of CEO hometown identity on audit fees.…”