Corporate litigation and stock price crash risk: evidence from China

ABSTRACT

As judicial systems in emerging economies grow increasingly sophisticated, corporate litigation is emerging as a powerful mechanism for corporate governance. Focusing on the Chinese financial market, our research examines the impact of corporate litigation on stock price crashes risk. Our findings indicate that corporate entanglement in lawsuit leads to a notable reduction in stock price crash risk, and an increase in both the frequency and magnitude of litigation correlates with a diminished stock price crash risk. A deeper analysis reveals that capital-related litigation exerts a more pronounced effect on stock price crash risk than product-related litigation and other types litigation. Mechanism analysis suggests that corporate litigation mitigates crash risk by improving the quality of information disclosure. Additionally, we observe that the inverse relationship between corporate litigation and crash risk is particularly pronounced for firms with lower level of external monitoring.

KEYWORDS:

• Corporate litigation
• stock price crash risk
• information disclosure
• external monitoring

JEL CLASSIFICATION:

• G30
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [71901107]; National Social Science Foundation of China [20AGL011].