Major Litigation,Information Environment,and Debt Financing Cost Of Chinese Listed Firms

The cost of corporate debt financing has always been an important topic in the field of corporate finance and also the focus of Chinese decision-makers in recent years.The negative impact of major litigation on the cost of corporate debt financing is partly due to excessive negative expectations from external stakeholders and corporate governance problems exposed or triggered by major litigation.The effective ways to alleviate these problems are to strengthen communication between debt parties,improve corporate information transparency,and reinforce external supervision of firms to restrain the self-interest behaviors of internal managers.Based on the information asymmetry and agency theory,this paper makes a comprehensive and systematic review of related literature,and theoretically analyzes and empirically investigates how the high costs and a series of uncertain risks of major litigation affect the cost of corporate debt financing,how the information environment and the improvement of information environment brought by the opening of high-speed railway affect the cost of corporate debt financing,and how the information environment affects the relationship between major litigation and the cost of corporate debt financing.Specifically,based upon a sample of Chinese A-share listed firms from 2008 to 2018,this paper sets up three proxies for major litigation,including whether a firm has a major litigation,the frequency of a firm that gets involved in major litigation and the total amount involved,and then empirically examines the impact of major litigation on debt financing cost.Further,this paper explores the influence of corporate heterogeneity on the relationship between major litigation and debt financing cost.Next,this paper uses analyst’s attention,media tracking,and institutional investors’ participation to be as firms’ information environment indexes,to empirically investigate the influence of information environment on the cost of debt financing.In the meanwhile,this paper creates an exogenous variable for the improvement of information environment: the opening of high-speed railway.Based on the hand-collected data of high-speed railway openings,this paper sets up three proxies for the opening of high-speed railway,including whether a firm’s location has a high-speed railway station,the number of lines pass through the city that a firm located in,and the total mileage of the lines,and then empirically examines the relationship between high-speed railway opening and debt financing cost.Further,this paper applies the channel test method to reveal the influence path and mechanism of high-speed railway opening on debt financing cost.Finally,this paper examines how information environment affects the relationship between major litigation and debt financing cost,that is,how the basic relationship between major litigation and debt financing cost changes with the information environment.The main conclusions are as follows:First,the regression results of major litigation and debt financing cost show that the occurrence of major litigation will increase the cost of corporate debt financing,and the more severe the major litigation,the higher the firm’s debt financing cost.Besides,compared with other types of major litigation,intellectual property dispute,debt dispute,and security fraud dispute have more detrimental impact on debt financing cost.In addition,the relationship between major litigation and debt financing cost is more significant in firms with worse solvency,weaker political background,and lower quality of information disclosure,which implies that firms with higher debt risk have to use higher cost of debt financing to meet their funding needs when they encounter major litigation.Second,the regression results of information environment and debt financing cost show that better information environment can help firms get a lower cost of debt financing.Using the opening of high-speed railway as a proxy for the improvement of information environment,we find that the opening of high-speed railway is helpful for firms to obtain debt financing at a lower cost.Moreover,the more lines pass through a firm’s location and the longer the mileage is,the lower debt financing cost the firm gets.In terms of the results of impact mechanism analysis,it is shown that on one hand,the opening of high-speed railway alleviates information asymmetry and agency conflicts between firms and creditors through improving information environment and thus the quality of corporate information disclosure;on the other hand,the improvement of information environment breaks the geographical limitation of debt financing,expands fund resources available to firms,and then improves firms’ financial slack,thus reducing the cost of corporate debt financing.Third,the results of the moderate effect test on the impact of information environment on the relationship between major litigation and debt financing cost show that better information environment can alleviate the negative impact of major litigation on the cost of corporate debt financing.The results of regressions by group show that when information environment is better or improved,the regression coefficients and significance levels of major litigation to debt financing cost experience an obvious decrease.This is because that better information transmission and more external oversights can improve firms’ information transparency and restrain managers’ opportunism behaviour,which alleviates adverse selection before financing and moral hazard after financing,thus weakening the negative impact of major litigation on debt financing cost.In addition,the improvement of transportation convenience and information environment brought by the opening of high-speed railway are also conducive for firms to obtaining more debt financing resources,and then alleviate the financing constraints faced by firms with major litigation,thus reducing the cost of corporate debt financing.The conclusions of this paper on major litigation can be regarded as a kind of legal warning to corporate managers,that is,the high costs and risks of major litigation will not only damage a firm’s market value,but also have a negative impact on its debt financing cost.This helps to restrain managers’ opportunism behaviour and firms’ business activities.In addition,since both sides in the major litigation suffer the detrimental impact,firms should enhance legal awareness and regulate its practices in economic activities to try to avoid getting involved in major litigation,and improve dispute resolution mechanisms in the meanwhile.The conclusions of this paper on the opening of high-speed railway provide theoretical support and empirical evidence for the impact of China’s infrastructure construction on information environment and corporate debt financing,which further enriches the study of “High-speed Railway Economics” and also provides a new perspective for the research of corporate finance and locations.The research on the relationships among major litigation,information environment,and debt financing cost reveals the importance of information environment for firms which get involved in negative events,such as major litigation.Firms should take into account the information environment when dealing with negative events and constantly improve their information transparency and reputation so as to enhance their ability to resist the external negative shocks.