Customers’ litigation risk and suppliers’ cash holding decision: From the perspective of risk contagion

Abstract

This study investigates the contagion effect of litigation risk through supply chain. We find strong evidence that customers’ litigation risk increases suppliers’ cash holding, and this contagion effect only exists when customers get involved in lawsuits as defendant. We further find that customers’ litigation risk reduces trade credit for customers, increases financing cost and operating risk for both customers and suppliers, which are underlying channels. Heterogeneity analysis shows that the risk contagion effect is more significant in samples with short supplier-customer geographic distance, private suppliers, and suppliers with strong bargaining power.