Does Corporate Litigation Aggravate Managerial Bad-News Hoarding? Evidence from Stock Price Crash Risk

Abstract

Using Using Chinese A-share listed firms during 2007-2020, we find that corporate litigation positively impacts stock price crash risk. This study also provides empirical evidence supporting the ex-post incremental effect of litigation on managerial bad-news hoarding through the results that litigation increases agency costs, reduces the quality of internal control, and triggers more earnings manipulation. Operating lawsuits significantly increase crashes, while securities lawsuits do not, indicating operating lawsuits incentive underlying managerial bad news hoarding. Corporate social responsibility moderates the litigation-crash relationship, even for operating lawsuits. This relationship is more prominent for firms with weak regional legal environment and executives with legal backgrounds.

Keywords: Corporate Litigation, Stock price crash risk, agency theory, Bad News Hoarding, Corporate Social Responsibility