Litigation pressure and pollution: How shareholder lawsuits shape corporate emission strategy

Abstract

We study whether and through what channels shareholder litigation risk shapes firms’ greenhouse-gas (GHG) emissions by altering managerial decision constraints and resource allocation to emission-reduction initiatives. We exploit the staggered adoption of U.S. Universal Demand (UD) laws, which raise the bar for derivative suits and thereby lower litigation pressure, in a difference-in-differences (DiD) design covering S&P 500 firms, 1993–2020. We interpret the DiD as identifying a reduced-form effect of litigation pressure on emissions, and then show how three forces, i.e., industry carbon intensity, financing constraints, and the Inevitable Disclosure Doctrine (IDD), moderate this effect along the causal chain. Firms exposed to lower litigation pressure emit more: our preferred estimate implies 48 % higher emissions after UD adoption. The effect is attenuated in high-emission industries, for financially constrained firms, and in IDD states, consistent with stronger constraints or career concerns keeping managers engaged in abatement even when litigation pressure weakens. Results survive extensive identification checks and alternative measures. We conclude that shareholder litigation operates as external governance that tightens managerial constraints and sustains resource allocation to abatement.

Keywords: Shareholder Litigation, GHG Emissions, Corporate Governance, Environmental Performance, Derivative Lawsuits, Universal Demands Laws