Risk management committee and corporate litigation: evidence from China

Purpose This paper examines the relationship between the establishment of a voluntary, standalone risk management committee (RMC) and corporate litigation. Design/methodology/approach We use the Poisson regression specification to deal with the count nature of our dependent variable. To validate the parallel trends assumption and assess the dynamic effects of establishing a voluntary RMC on corporate litigation, we perform a dynamic DID test. Findings Using data from a sample of listed Chinese firms spanning the period from 2009–2020, we find that firms with voluntary RMCs are associated with fewer lawsuits. Our results are robust to endogeneity concerns. Our results further reveal that larger RMCs and RMCs with members possessing greater human capital contribute to reducing stakeholder litigation actions. Our empirical evidence further supports the assertion that information asymmetry mediates the negative relationship between RMCs and corporate litigation. More importantly, we find that the negative association between RMCs and litigation is insignificant in state-owned enterprises. Practical implications Our evidence supports the notion adopted by regulators and practitioners that forming a voluntary, standalone RMC plays a substantial role in a firm's risk governance and, hence, reduces the risk of corporate litigation. Originality/value Our study provides an improved understanding of how RMCs function to reduce litigation risk, offering an integrated explanation that draws on information asymmetry, monitoring mechanisms and resource dependency theory. The effect of RMCs on litigation risk operates through reduced information asymmetry because firms with RMCs narrow the information gap between managers and investors, thereby lowering litigation exposure. We further demonstrate that such governance structures may become symbolic in environments characterized by principal–principal conflicts.