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.

This paper explores the impact of political network on insider trading activities in China. We find that stronger political network discourages insider trading. Such effect is more pronounced among long-standing and high-level connections, and persists in the events of M&A and public policy announcement when insiders may make profitable informed trading. This finding points to new cost of being politically connected. In exploring the underlying mechanisms, we confirm that the muted insider trading is related to preferable financial and policy support, and are more pronounced for SOEs in provinces with stronger market force and legal enforcement.

In a frictionless market where  rms can always raise capital, debtors default only if their total assets cannot cover their total liabilities. However, in the presence of market imperfection, debtors may default even while solvent if the cost of new capital outweighs the legal penalty on contract violation. Using a unique sample of Chinese bank loans over the period 2007-2012, we analyze the repayment decisions of borrowing rms whose cash holdings are high enough to cover the bank debt coming due. We  nd that poor legal enforcement signi cantly increases the likelihood of default. This positive association becomes stronger if  rms face tighter  nancing constraints, or when credit supply becomes more scarce. Our results illustrate the role of legal enforcement in determining  nancial risks and show that market imperfection strengthening the impact of legal enforcement on  nancial risks.