Analysis reveals reduced stock price crash risk in small firms following legal liability reform, suggesting changes in earnings management practices.
We investigate the impact of a 2001 Nevada corporate law reform, which reduced the legal liability of corporate directors and officers, on stock price stability. Our analysis addresses previous conflicting evidence and reveals a significant decrease in stock price crash risk following this legal change, particularly among small, young, and weakly governed firms. We attribute this reduction primarily to diminished earnings management practices and improved quality of corporate information disclosures. Our findings underscore the influence of reduced managerial legal liability on shaping the corporate information landscape and mitigating stock price crash risk.
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Cao et al. (2025) studied this question.
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