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When lawsuits speak louder: Litigation risk and corporate financing constraints

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  • Ma, Haiyan
  • Ma, Xiaoning
  • Lei, Xue
  • Jiang, Yu
  • Li, Yuan

Abstract

Lawsuits are often viewed as signals of operational problems, but their financial consequences may arise even when core business relationships remain stable. This study investigates how litigation risk affects firms’ financing conditions by focusing on its indirect revenue effects and the roles of investor sentiment and institutional context. Using panel data on Chinese A-share listed firms from 2007 to 2023 and employing fixed-effects and 2SLS models, the analysis finds that litigation risk tightens financing constraints mainly through revenue deterioration rather than structural changes in customer concentration. Investor sentiment shapes this relationship asymmetrically: optimistic sentiment dampens financing pressures, while pessimistic sentiment amplifies them. Investor attention weakens the negative effect by improving information transparency. Moreover, the impact is stronger in regions with more developed legal institutions. These results suggest that legal disputes influence financing less through direct operational disruption and more through how markets interpret legal signals, offering new insights into the interaction between legal events and financial markets.

Suggested Citation

  • Ma, Haiyan & Ma, Xiaoning & Lei, Xue & Jiang, Yu & Li, Yuan, 2026. "When lawsuits speak louder: Litigation risk and corporate financing constraints," Economic Analysis and Policy, Elsevier, vol. 89(C), pages 578-590.
    • Handle: RePEc:eee:ecanpo:v:89:y:2026:i:c:p:578-590
    DOI: 10.1016/j.eap.2025.12.020
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