Financial mismatch and corporate litigation risk

Abstract

This study investigates how financial mismatches impact corporate litigation risk among China's A-share listed companies from 2017 to 2022. A financial mismatch generally refers to a situation in which a company's financial resources are not optimally aligned with its investment needs, which can lead to inefficiencies and higher financing costs. Our study found that such mismatches increase the likelihood that companies will face legal disputes, which can escalate costs and damage reputations. Additionally, financial linkages—connections between companies and financial institutions—can mitigate these risks by reducing companies’ financing constraints, thereby lowering litigation risk. Using robust statistical methods, including ordinary least squares regression, robustness, and endogeneity tests, we confirm these findings, thus contributing to our collective understanding of the financial dynamics that influence corporate litigation risk and highlighting the importance of aligning financial strategies with corporate needs to minimize legal challenges and enhance stability.