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Litigation and corporate risk taking: Evidence from Chinese listed firms

Xiaoge Liu, Miao Miao and Ruiming Liu

International Review of Law and Economics, 2020, vol. 61, issue C

Abstract: Corporate risk-taking plays a crucial role in their development and in overall economic growth. With the increase in market uncertainty and the advancement of the legalization process, the probability of companies being involved in lawsuits has continued to increase. How does a company’s litigation experience affect its risk-taking? Is it “once bitten, twice shy” or will it be “take a nap, grow up with wisdom?” Furthermore, what strategies can be implemented by a company to enhance its risk-taking? Using the difference-in-differences method, this study adopts the data of listed companies from 2000 to 2015 to examine the impact of litigation on corporate risk-taking and its internal mechanism. Two main findings are obtained. First, the indicted experience significantly improves a company’s risk-taking. Second, this “learning effect” is embodied as “nonproductive activities,” and the accused enterprises can realize property right protection and risk-taking by reducing R&D investment and increasing rent-seeking investment. These findings are proven to be valid after a series of robust tests. The orientation of entrepreneurship is highly dependent on the institutional environment where a company is located. In the transitional period, truly enhancing the risk-taking of enterprises and giving play to the “productive function” of the entrepreneurial spirit are needed to continuously strengthen the system construction of a company’s operating environment and create a fair and just legal environment.

Keywords: Litigation; Risk-taking; Deterrent effect; Learning effect; Entrepreneurship (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.irle.2019.105879

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International Review of Law and Economics is currently edited by C. Ott, A. W. Katz and H-B. Schäfer

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