Economic policy uncertainty and litigation risk: Evidence from China

With the continuous promotion of legal system construction, the enforcement requirements for China's capital market have become stricter. Therefore, the risk of litigation faced by listed companies is gradually increasing. This study uses a sample of Chinese A-share listed companies from 2010 to 2021 to empirically test the impact and mechanism of economic policy uncertainty on corporate litigation risk. Research shows that economic policy uncertainty significantly increases litigation risk. This conclusion holds true after a series of robustness and endogeneity tests. Mechanism analysis shows that the paths through which economic policy uncertainty affects litigation risk are corporate fraud, internal control, and corporate transparency. Furthermore, this effect is more significant for firms located in regions with strong legal systems and those with weak external governance, aggressive strategies, and CEOs with less social capital. This study provides new empirical evidence for the negative impact of economic policy uncertainty on enterprises and new references for regulating the governance behaviour of listed companies and promoting the stable operation of the capital market.