This paper investigates how transparency in lawsuit information affects capital allocation and aggregate industrial production. Greater transparency enhances the availability of information about firms' fundamentals, which can influence resource distribution. We exploit regional variations in courts' compliance with mandated judicial document disclosures in China, implemented since 2014, as a natural experiment. For firms with initially high marginal revenue products of capital (MRPK), a 10-percentage-point increase in legal transparency results in a 4.4% increase in physical capital and a 7.9% reduction in MRPK, relative to firms with lower MRPK. Additionally, regions with higher transparency experience a rise in aggregate output. Further analysis differentiating firms by ownership type, public listing status, and industry-level contract intensity enhances the robustness of our findings.

This study finds that reducing political influence over local courts weakens local government debt capacity. We establish this result by exploiting the staggered roll-out of a judicial centralization reform aimed at alleviating local court capture in China and find reduced judicial favoritism towards local governments post-reform. The majority of local government lawsuits are with contractors over government payment delays. The reform not only increases government lawsuit losses but also exposes their credit risk, as payment delays without court support signal government liquidity constraint. Investors respond by tightening lending and increasing interest rates, which curbs government spending.

This study investigates and compares the effects of the Coronavirus Disease 2019 (COVID-19) pandemic, the Chicago Mercantile Exchange (CME)'s negative price suggestion on prices and trading activities in the crude oil futures market to discuss the cause of negative crude oil futures prices. Through event studies, our results show that the COVID-19 pandemic no longer impacts crude oil futures prices in April after controlled market risk, while the CME’s negative prices suggestion can explain the crude oil futures price changes around and around even after April 8 to some degree. Moreover, our study uncovers anomalies in prices and trading activities by analyzing returns, trading volume, open interest, and illiquidity measures using vector autoregressive (VAR) models. The results imply that CME’s allowing negative prices strengthens the price impact on trading volume and makes illiquidity risk matter. Our results coincide with the following lawsuit evidence of market manipulation.

We examine the economics of independent directors’ resignation decisions by taking advantage of a natural setting: The revised Securities Law of the People’s Republic of China, which took effect on March 1, 2020 (hereafter New Securities Law or NSL), and the first successful class-action securities lawsuit on November 12, 2021. We argue that by increasing 18-fold the penalties to directors of firmsthat misreport, NSL reduces by the same factor the maximum probability of getting caught at which director positions remain economically viable. We predict and find that in the short run when director compensation is fixed, NSL leads to more frequent voluntary resignations, particularly in firms that have a higher ex-ante likelihood of financial misreporting, and in firms where director compensation is lower. We also find that independent director dissent that arises primarily as a result of directors’ inability to establish whether their firms’ financial reports are reliable is a significant antecedent to voluntary resignations post NSL. Finally, analyzing the fraction of Chinese publicly traded firms that purchase director and officer liability (D&O) insurance, we find that independent directors are less likely to resign pre NSL but more likely to resign post NSL. Thisfinding suggeststhat firms with higher misreporting risk self-select pre NSL into such contracts. Given directors’ valuable monitoring role, we expect to observe in the long run both increased independent director compensation and increased D&O insurance coverage.

Standard principal-agent theory predicts that the pay-performance sensitivity (PPS) decreases in the risk of the firm. An alternative literature argues that entrenched executives as in weakly governed firms use compensation contract to extract the rent, which renders risk irrelevant in determining PPS. This paper uses event study approach to test both principal-agent model and CEO power theory by studying changes in executives’ compensation contract around litigation events. Consistent with principalagent model prediction, we find that, after the initiation of litigation, PPS drops, compensation shifts from performance-sensitive component (equity) to performanceinvariant component (cash). In addition, all the changes reverse themselves after litigation settlements. To test CEO power theory, we further partition the event firms into firms with good and bad corporate governance. We find that the PPS in firms with bad corporate governance increases after lawsuit and decreases after the settlement. This suggests that litigation brings the bad compensation practice of poorly governed firms to the limelight and forces firms to discipline their CEOs temporarily during the litigation period (so called “limelight effect”), which lends indirect support to CEO power theory. Our results are robust to a battery of sensitivity tests including two endogeneity tests.