The digital sentinel: artificial intelligence and the mitigation of corporate litigation risk

Guo Wu and Anqi Du

Journal of Operational Risk

Abstract: We provide robust evidence that the strategic adoption of artificial intelligence (AI) yields a net reduction in corporate litigation risk. Using firm-level data from Chinese A-share listed firms from 2008 to 2023, we show that AI significantly reduces corporate litigation risk and that firms with greater AI adoption experience fewer lawsuits, face reduced monetary damages and are less likely to be sued. The findings remain consistent across various robustness tests and endogeneity treatments. We also demonstrate that AI operates through two complementary channels: an organization-improving effect, which enhances innovation proactivity, knowledge diversity and information transparency; and a cost-cutting effect, which reduces operational, management and financial constraints. In addition, we indicate that the risk-mitigating effects of AI are heterogeneous in terms of firm characteristics and life cycle, and we find that AI adoption also corresponds to a lower probability of corporate default and increased managerial agility. The findings suggest that AI has benefits in mitigating litigation risk, and that it is not a replacement for human oversight but a powerful tool that empowers and enhances corporate stability and governance. The implications for various stakeholders are also highlighted.

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