Litigation risk, green innovation and corporate reputation: empirical evidence from China

Purpose This study aims to examine the impact of litigation risk on corporate reputation and performance. In addition, the study examined the moderating role of green innovation strategies in mitigating the impact of litigation risk on reputation and performance. Thus, the current study proposed an interactive model to eliminate Type I, II and Type III agency conflicts arising from litigation risk in firms. Design/methodology/approach To scrutinize the proposition’s validity, the study tested A-share listed Chinese firms from the Shanghai Stock Exchange and Shenzhen Stock Exchange (SZSE) for 2014–2021. The selected sample is regressed using Arellano and Bond (1991) dynamic panel data methodologies to address the issues of endogeneity, heteroscedasticity and autocorrelation of the unbalanced panel data. Findings The study results show that agency conflicts arising from litigation risks negatively affect corporate reputation and performance. However, corporate green innovation strategies positively moderate between litigation risk and response variables. The econometric results are consistent by controlling for the effects of firms’ size, financial leverage and firms’ age. Research limitations/implications The findings are useful for corporate managers in formulating green strategic policies, especially when the firm is under the threat of litigation, and for regulatory authorities in the implementation of rules and regulations related to green management practices. The findings of the study are also helpful for individuals in making a diversified, low-risk investment portfolio. Originality/value The study contributes to corporate finance and strategic management literature by highlighting the significance of management green innovation practices in restoring corporate reputation, which deteriorates due to threats of litigation in firms. Thus, this research bridges this gap in the existing body of corporate finance literature. The study also contributes by developing an index of corporate reputation in the context of emerging economies in light of existing literature.