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One false step can make a great difference: Does corporate litigation cause the exit of the controlling shareholder?

Ruiming Liu, Haiping Si and Miao Miao

Journal of Corporate Finance, 2022, vol. 73, issue C

Abstract: Controlling shareholders dominate corporations and shareholder exit behavior is usually accompanied by the transfer of control. Using China's A-share listed companies as data from 2000 to 2017, this study investigates the effect of corporate litigation on the exit of controlling shareholders and related mechanisms for the first time. Empirically, we find that if a firm is involved in a lawsuit as a defendant, then the possibility of the controlling shareholder's exit increases. This finding is robust to various checks, including the parallel-trend assumption, placebo, instrumental variable tests, and the consideration of other potential factors. The tests reveal that this effect is mainly due to an increase in three aspects—the uncertainty of the firm's future cash flow, corporate risk, and external financing costs. Heterogeneity analyses find that contract lawsuits exhibit the strongest positive predictive powers over the subsequent exits of controlling shareholders. The firm's majority controlling shareholders, and institutional, non-family, and non-financial controlling shareholders are more likely to exit upon litigation.

Keywords: Corporate litigation; Exit of the controlling shareholder; Uncertainty; Stock price fluctuation; Financial cost (search for similar items in EconPapers)
JEL-codes: G32 G34 K41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jcorpfin.2022.102192

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