To Sue or Not To Sue

In this paper, we investigate if the perceived name-based ethnicity of CEOs influences the probability of shareholder class-action lawsuits. Using machine learning algorithms on CEO names, we develop an objective proxy of name-based ethnicity and find that, firms managed by ‘foreign-sounding’ CEOs exhibit a lower probability of class-action lawsuits. Our results are robust to matched sample analysis, Heckman two-stage selection, alternate model specifications as well as use of an alternate methodology. We further find that succession of a foreign sounding CEO by a non-foreign-sounding CEO significantly increases the probability of class-action lawsuits. Our paper has important implications for firms, especially in high litigation industries or high litigation situations. Hiring a foreign-sounding CEO can significantly reduce the likelihood of lawsuits and hence, costs associated with lawsuits. However, despite the lower probability of class-action lawsuits, we do not see more firms being managed by foreign sounding CEOs.