Litigation Risk and Stock Price Crash Risk

This study examines the relationship between litigation risk and stock price crash risk. Using a sample of Chinese A-share listed firms and a comprehensive range of lawsuits filed against their firms covering 2000 to 2020, we find that litigation risk is positively related to stock price crash risk for a firm sued in a lawsuit. The finding also remains robust after robustness checks and consideration of endogeneity problems. We further find that firm value and legal environment perform negatively moderating impacts on the litigation-crash relationship. Moreover, cross-sectional analyses indicate that this relationship is more prominent for firms with weak corporate governance, high information asymmetry, weak external monitoring, and in low litigationrisk industries. Collectively, our findings are consistent with the agency theory explanation for the positive litigation-crash relationship due to bad news hoarding of managers