Abstract

This paper explores whether ownership characteristics, qualified foreign institutional investors, geographic distance between the firm’s headquarter and its largest institutional investors, and the legal environment a firm operates in affect a firm’s litigation risk in China. Using a comprehensive sample of publicly listed firms and a subsample of sued firms from 2009 to 2018, we employ logit regression to examine our hypotheses. We find that state ownership, foreign institutional investors, and the legal environment have a strong influence on a firm’s risk of being sued. We also find negative coefficients for long-term institutional investors' ownership and positive coefficients for the distance between the firm and its largest long-term institutional investors, but both coefficients are insignificant. Our findings provide important insights into the role of active versus passive monitoring in the Chinese market and their effects on a firm’s likelihood to be ousted for alleged fraud.