Corporate litigation and CEO accountability: evidence from China

With corporate litigation has gradually become one of the remarkable corporate risks and development constraints for Chinese firms, there is an increasing need for an empirical study that examine the impact of corporate litigation on CEO accountability. To address this need, this study uses bivariate logit estimations for panel data of 3746 Chinese publicly listed firms during 2009-2020 to demonstrate that corporate litigation is significantly associated with increased CEO turnover and compensation reduction. It further investigates the baseline effects across firm performance, pay disparity and ownership structure which present stronger effects for poor performers and private-owned firms, yet high pay disparity correlates with a greater likelihood of compensation reduction whereas low pay disparity is associated with a higher likelihood of CEO turnover. Moreover, while securities lawsuits increase CEO turnover probability, non-securities lawsuits could lead to either CEO turnover or CEO pay cut. This study is the first to investigate the impact of corporate litigation on CEO accountability in China. The evidence supports the idea that top executives should be held accountable when firms encounter corporate litigation.