Government intervention and corporate litigation: evidence from China’s de-capacity policy

Government intervention is an important source of corporate litigation. However, this relationship has received relatively little attention in the empirical literature. Taking China’s 2015 “de-capacity policy” as an exogenous shock, we examine the influence of government’s intervention on corporate litigation. We find that the de-capacity policy increased corporate litigation significantly based on China’s listed companies’ panel data from 2013 to 2017. On average, for firms in overcapacity industry after the policy shock, the number and scale of corporate litigation increased 23.4% and 35%, respectively. Several robustness tests confirm this finding. Heterogeneous tests show that the effect is greater for non-state-owned firms and for financially constrained firms. In addition, the de-capacity policy has a more significant impact on contractual lawsuits than intellectual property lawsuits. Further mechanism tests show that the de-capacity policy leads to increased pressure on the firms’ cash flow, increased stock price volatility, and more frequent earnings management behaviors in the short term, which would finally induce litigation.