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The spillover effect of litigation risk on peer firms’ ESG performance: Evidence from circuit courts in China

Author

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  • Huang, Jun
  • Huang, Xin
  • Xu, Xiangbing

Abstract

Lawsuits against industry counterparts increase perceived litigation risk among peer firms. Using a difference-in-differences approach, we investigate how peer firms' strategic reactions to mitigate litigation risk interact with the insurance value of ESG (Environmental, Social, and Governance) performance. Exploiting China's establishment of Circuit Courts to construct exogenous variation in litigation risk exposure for sued entities' industry peers, we find that peer firms exhibit significant declines in ESG performance post-reform. This decline is consistent with an industry-wide stigma effect, whereby firm-level lawsuits intensify financial constraints and erode public trust in peer firms, weakening the insurance role of ESG. In response, peer firms intensify impression management while reducing substantive ESG practices. Moreover, the deterioration in ESG is most pronounced among peer firms with limited resources, higher public visibility, and closer proximity to the Circuit Courts. Our findings suggest that China's judicial reform amplifies the stigma effect of litigation, undermining ESG's role as a risk mitigation tool within lawsuit-exposed industries.

Suggested Citation

  • Huang, Jun & Huang, Xin & Xu, Xiangbing, 2026. "The spillover effect of litigation risk on peer firms’ ESG performance: Evidence from circuit courts in China," Economic Modelling, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:ecmode:v:159:y:2026:i:c:s0264999326000817
    DOI: 10.1016/j.econmod.2026.107552
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    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • P30 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - General

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