Does patent infringement litigation affect stock price crash risk? Evidence from China

Previous studies have examined the determinants of stock price crash risk. However, extant literature overlooks the relationship between patent infringement litigation and stock price crash risk. Based on a dataset of Chinese firm‐year observations for the period 2007–2021, we fill the gap by examining how patent infringement litigation affects stock price crash risk and the underlying channels through which this effect occurs. We provide robust evidence that corporate patent infringement litigation increases its risk of one‐year‐ahead stock crash. This unfavourable effect is more pronounced in firms that were involved with invention patent infringement lawsuits, lost a patent litigation case, suffered from larger litigation costs and are defendant firms. The channel analysis confirms that increased information risks and exacerbated financial constraints are two plausible channels explaining how patent infringement litigation leads to stock price crash risk. Finally, we find that effective corporate governance and risk‐taking level are conducive to mitigate the unfavourable effect of patent infringement litigation on stock crash risk. This study enriches the literature on stock price crash risk from the perspective of patent infringement litigation.