United we stand, divided we fall: The impact of top management team stability on corporate litigation

Abstract

Escalating commercial litigation in emerging markets arouses growing concerns for listed companies, while certain corporate governance practices are proved to be effective in curbing litigation risks. Using panel data from China’s A-share listed companies, we demonstrate that a stable top management team is a cornerstone in reducing a firm’s exposure to litigation risk. We find that this inhibitory effect is achieved by mitigating agency problems, strengthening internal controls, and cultivating firm-specific human capital. Further analyses reveal that this effect is more pronounced when TMTs have more company ownership, exhibit stronger managerial discretion, and maintain a higher proportion of female executives, or when they experience greater environmental uncertainty. Additionally, a strong legal environment and institutional monitoring can both serve as substitutes for top management team stability in reducing corporate litigation risk. Our study contributes to the literature by providing empirical evidence of the positive impact of top management team stability on corporate risk management.