Does Requiring Shareholder Demand Increase Firm Value?

California, like many other states, imposes a demand requirement on shareholders who want to maintain a derivative action.  Thus, Corporations Code Section 800(b)(2) requires that a plaintiff allege in its complaint with particularity "plaintiff’s efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort, and alleges further that plaintiff has either informed the corporation or the board in writing of the ultimate facts of each cause of action against each defendant or delivered to the corporation or the board a true copy of the complaint which plaintiff proposes to file".

Some states go further than California and impose a so-called universal demand requirement.  In these states, a shareholder must always make a demand on the board.  Demand requirements are usually explained as arising from the board of director's authority to manage the business and affairs of the corporation.  That authority includes the authority to decide if, and when, the corporation files a lawsuit.  But could there be an economic rationale for a imposing a demand requirement as well?

According the authors of a recent study, firm value actually increases after a demand requirement is imposed.  Nam H. Nguyen, Hieu V. Phan, and Eunju Lee examined the adoption of shareholder demand laws by U.S. states over the period 1989-2005.  They found that firms increase financial leverage after enactment of these laws even while those laws weakened shareholder litigation rights.  More leverage resulted in higher firm values.  Shareholder Litigation Rights and Capital Structure Decisions, Journal of Corporate Finance 62 (June 1, 2020).