Does stock market liberalization mitigate litigation risk? Evidence from Stock Connect in China

Prior studies have examined the economic consequences of stock market liberalization. However, the literature overlooks the relationship between stock market liberalization and litigation risk. We fill this research gap using a dataset of 19,696 Chinese firms over 2009-2018 and study how an important reform of stock market liberalization-Stock Connect-affects corporate litigation risk and the underlying channels through which this effect occurs. We find that Stock Connect has a positive effect on litigation risk in China, which is the result of a firm's improved information transparency after market liberalization. Finally, we find that the benefits of Stock Connect are more pronounced in non-state-owned enterprises; in firms with higher leverage, higher agency costs, lower investor concern, and firms without overseas operations or fierce market competition. This study provides new insights into understanding the positive effect of stock market liberalization in emerging markets.

Automated summary

This study examines how Stock Connect, an important reform of stock market liberalization, affects corporate litigation risk in China. The findings show a positive effect of Stock Connect on litigation risk, attributed to improved information transparency after market liberalization, with more pronounced benefits in non-state-owned enterprises and certain types of firms.