Litigation Risk and Corporate Social Responsibility—Evidence from a Poverty Alleviation Campaign in China

Abstract

This paper investigates the impact of an external uncertain factor, litigation risk, on corporate participation in Targeted Poverty Alleviation (TPA) activities. It proposes and explores three possible mechanisms, namely, restore legitimacy, send positive signals, and maintain corporate reputation, for corporations to manage their litigation risk via the participation in TPA. Using a sample of Chinese listed firms from 2016 to 2020, it shows that for corporations with high legitimacy pressure, high stakeholder concern, and strong reputation protection motive, litigation risk increases corporate investment in TPA. After litigation cases arise, corporations can manage their litigation risk through participation in TPA, thereby restoring legitimacy, sending positive signals, and maintaining corporate reputation. Furthermore, participation in TPA can also moderate the negative impact of litigation risk on enterprise value. The results remain significant after robustness tests on endogeneity, variable and measurement errors, and firm fixed effects. This paper is insightful for future studies relating to the economic consequences of litigation risk. Concurrently, by exploring the role of China’s legal environment in promoting the effect of corporate participation in TPA, this paper not only expands the scope of factors influencing corporate TPA inputs, but also provides policy implications for the formulation of China’s upcoming Rural Revitalization Strategy.