Internal Control Quality and Litigation Risk -Evidence from China

Abstract

This paper introduces internal control quality to study litigation risk which enrich the literature of how to reduce firms’ litigation risk. This paper use listed company data from 2000-2015 in China A-share market to research how firms’ internal control affect litigation risk, and which kind of influence on litigation risk caused by internal control. By using regression model and conducting endogenous test, this paper finds that the higher internal control quality, the lower litigation risk of firms by reducing the number of involving litigation and funds used in lawsuit. If companies with good internal control quality, they can avoid many risks caught by litigation risk. Especially for firms in growth and undeveloped market, internal control quality can play a more vital role in corporate governance.

Keywords: Internal Control, Litigation Risk, China Studies, Corporate Governance

JEL Classification: G30, G32, G34