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Litigation risk and cost of capital: Evidence from China

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  • Qin, Jiaqi
  • Yang, Xue
  • He, Qing
  • Sun, Lingxia

Abstract

Using a unique dataset of corporate lawsuits disclosed by China's listed companies, we find a positive relationship between litigation risk and firms' overall cost of capital, cost of equity, and cost of debt. More importantly, we propose two possible mechanisms to mitigate the consequences of litigation risk and find that strong internal corporate governance and intensive social capital investments negatively moderate the relationship between litigation risk and cost of capital. The main findings are robust to the propensity score matching approach, the treatment effect model, and alternative measures. Further analyses show that the relation between litigation risk and cost of capital attenuates among big companies, state-owned companies, informationally transparent companies, and companies located in regions of higher social trust.

Suggested Citation

  • Qin, Jiaqi & Yang, Xue & He, Qing & Sun, Lingxia, 2021. "Litigation risk and cost of capital: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x19305281
    DOI: 10.1016/j.pacfin.2020.101393
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    Cited by:

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    2. Fujun Lai & Sha Zhu & Qingxiang Feng & Yi Yao, 2021. "Effects of Financial Market Information on Firms’ Productivity Under Operating Pressure and Financial Constraints: Evidence From the Chinese Stock Market," SAGE Open, , vol. 11(4), pages 21582440211, November.
    3. Xu, Xiaodong & Mu, Yayu & Wang, Juan, 2023. "Corporate risk and financial asset holdings," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Litigation risk; Cost of capital; Internal governance; Social capital investments;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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