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Litigation risk and cost of capital: Evidence from China

Jiaqi Qin, Xue Yang, Qing He and Lingxia Sun

Pacific-Basin Finance Journal, 2021, vol. 68, issue C

Abstract: Using a unique dataset of corporate lawsuits disclosed by China's listed companies, we find a positive relationship between litigation risk and firms' overall cost of capital, cost of equity, and cost of debt. More importantly, we propose two possible mechanisms to mitigate the consequences of litigation risk and find that strong internal corporate governance and intensive social capital investments negatively moderate the relationship between litigation risk and cost of capital. The main findings are robust to the propensity score matching approach, the treatment effect model, and alternative measures. Further analyses show that the relation between litigation risk and cost of capital attenuates among big companies, state-owned companies, informationally transparent companies, and companies located in regions of higher social trust.

Keywords: Litigation risk; Cost of capital; Internal governance; Social capital investments (search for similar items in EconPapers)
JEL-codes: G32 G34 K41 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.pacfin.2020.101393

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