This study examines the relationship between industry litigation risk and corporate misconduct using China's A-share listed companies’ data from 2007 to 2022. The findings indicate a significant and negative association, where companies in industries with higher median litigation amounts relative to their assets exhibit reduced incidents of misconduct. This suggests that businesses in high-risk litigation sectors may adopt more cautious practices to mitigate legal challenges and protect their reputations. The robustness of these findings is confirmed through a variety of tests, including a quasi-experimental setting of the chief judges rotation implemented in 2008. Furthermore, the study finds that external monitors including financial analysts’ site visits and local law firms moderate the negative relationship between litigation risk and misconduct. We further show that legal enforcement and moral capital are the two channels through which industry litigation risk impacts corporate misconduct. Our findings underscore the role of litigation risk in shaping peer firms' behavior.

We examine the relation between the CEO’s childhood socioeconomic class and corporate labor policies. We find that CEOs raised in low socioeconomic class families are less likely to invest in employee friendly firm policies measured by several types of labor and employment litigation, including litigation by unions, and occupational safety measures. These results are confirmed by crowdsourced employee firm reviews across several workplace dimensions. Our findings are supported by the studies of within-family transmission of occupational knowledge and formation of occupational norms as well as development of empathy and altruistic behaviors in children.

Using one of the largest samples of litigation data available to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the politi- cal contributions of top managers, firm political action committees, and local residents. We show that firms with a Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than are Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and envi- ronmental protection. However, firms with a Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than are Republican firms, whose party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon lit- igation filing, both types of firms experience similar announcement reaction, which suggests that the observed relationship between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.

We study when CEOs with legal expertise are valuable for firms. In general, lawyer CEOs are negatively associated with frequency and severity in employment civil rights, contract, labor, personal injury, and securities litigation. This effect is partly induced by the CEO’s man- agement of litigation risk and reduction in other risky policies. Lawyer CEOs are further associated with an increase in gatekeepers providing additional legal oversight and a decrease in innovative activities with high litigation risk. Lawyer CEOs are more valuable during periods of enhanced compliance requirements and regulatory pressure and in indus- tries with high litigation risk or better growth opportunities.

We find that the level of short interest in a firm's stock significantly predicts future seasoned equity offers (SEOs). The probability of an SEO announcement increases by 34% (decreases by 49%) for firms in the top (bottom) quintile of short interest. We identify a causal impact of short interest on SEO issuance using a novel instrument for short interest based on future litigation filings in close geographical proximity to hedge fund centers. Our findings suggest that corporate decisions can be triggered by the aggregate trading activity of sophisticated outside investors.

Purpose – This study aims to investigate whether firms purchase directors’ and officers’ liability (D&O) insurance when the country-level economic policy uncertainty (EPU) is high. Design/methodology/approach – This study uses D&O insurance data from Chinese listed firms between 2003 and 2019 to conduct regression analyses to examine the association between D&O insurance and EPU. Findings – The results show that government EPU, despite being an exogenous factor, increases the likelihood of firms’ purchasing D&O insurance, and this effect is more pronounced when firms are exposed to great share price crash risk and high litigation risk, suggesting that firms intend to purchase D&O insurance possibly due to the accentuated stock price crash risk and litigation risk associated with EPU. In addition, the results indicate that the effect of EPU on the D&O insurance purchase decision is moderated by the provincial capital market development and internal control quality. Practical implications – The study highlights the role of uncertain economic policies in shareholder approval of D&O insurance purchases. Originality/value – The study enriches the literature on the determinants of D&O insurance purchases by documenting novel evidence that country-level EPU is a key institutional factor shaping firms’ decisions to purchase D&O insurance.

In contrast to previous literature, our study not only examines the communicative value of Key Audit Matters (KAMs) through the capital market reaction to KAMs but also analyses the content and reporting format of KAMs, which vary based on the intrinsic risk of business activity. Using a sample of Chinese firms from 2017 to 2020, we find that more M&A-related KAMs are reported and they are disclosed through less boilerplate language when M&As are accompanied with the Performance Commitment contracts (PCs), an indicator as high possibility of overpayment during M&As thus inducing the high risk of the goodwill impairment and high litigation risk. Additionally, we find that the negative impact of PCs on boilerplate language is amplified when the benchmark in PCs is precisely achieved or when the firm has been sued in recent years. In other words, the disclosure of M&A-related KAMs is more tailored to the client firm when auditors observe a high risk for accountability. Consequently, capital market participants, as well as other recipients of auditing reports, such as regulators and analysts, perceive non-boilerplate M&A-related KAMs as informative for their decision-making process.

Using a unique list of 528 fake state-owned enterprises (SOEs) exposed in China, we examine whether and how investors react to the government’s property rights protection actions. Our results show that real SOEs with more subsidiaries, pyramid layers, and popularity are more likely to be targeted by wrongdoers. We find that when fake SOEs were exposed, it caused a significant increase in the stock prices of listed central SOEs controlled by the State Council. Further analysis shows that the stock price rise is driven by both the cash flow and risk effects. We also find that the value impact of the crackdown is more pronounced for listed central SOEs with less media coverage, located in weaker legal protection regions, and facing more competition. Overall, our findings provide empirical support for the effectiveness of exposure, as a non-litigation channel of property rights protection, in enhancing firm value.

In this paper, on the premise that the expropriation of corporate assets by controlling shareholders would generate a residual loss, we studied how the laws of investor protection influenced on the decentralization of corporate ownership, the penalty and the cost of litigation. There are several interested conclusions we reached. At first, the effective protection of minority shareholders will lead to the decentralization of ownership, which is irrelevant to whether there is litigation cost or who should pay the cost. Second, if litigation costs remain unchanged, effective minority shareholder protection laws will evolve along a self-reinforcing path. On the other hand, if the penalty remains unchanged, effective minority shareholder protection laws will cause litigation costs to increase over time. These conclusions are irrelevant to who pays the litigation cost. Last, pay the cost by minority shareholders or controlling shareholders will cause litigation costs to increase or decrease with the penalty.

We examine empirically whether internal corporate governance mechanisms play a role in reducing the probability of being sued by lending banks due to bank loan default and the market reaction to the announcement of bank loan litigation. Using bank loan litigation events in Chinese financial markets, our results show that companies with better internal corporate governance mechanisms are associated with a lower probability of being sued. We also find a significant negative market reaction to the announcement of a bank loan filing while insignificant market reaction to the announcement of bank loan litigation verdict. Moreover, we test whether internal corporate governance mechanisms can play a role in mitigating the effect of market reactions. Our findings indicate that there is no evidence of internal corporate governance in mitigating this effect. Our paper suggests that internal corporate governance mechanisms are important in preventing the trigger of external governance mechanisms (litigation) but do not play any role once external governance (litigation) takes over.