Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), there is limited evidence on how D&O liability affects corporate innovation. We study this question by exploiting Nevada's 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly firms facing higher litigation risk or operating in more innovative industries. The results are driven mainly by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, although holding D&Os liable may be desirable overall, it also entails a cost by discouraging innovation in some firms. Our study has implications for how the litigation environment may influence sustainable growth via innovation.

Using surname sharing as a novel measure of social ties, we examine the effect of directors’ surname sharing on firm value. We find that boards with greater surname homogeneity are associated with lower firm value. This finding is not driven by familial ties. The negative effect of surname sharing on firm value is more pronounced when directors share rare surnames and when firms operate in regions with stronger clan systems, but is attenuated by stronger corporate governance mechanisms. The market reacts positively to plausibly exogenous director resignations that reduce director surname sharing, and negatively to board appointments that increase director surname sharing. Director surname sharing lowers firm value by reducing director dissension, granting excess executive compensation, and increasing related-party transactions. Overall, our results suggest that directors’ surname sharing, an easy-to-trace but previously neglected social tie, can have significant economic consequences.