Board Social Connection,Political Connection And Corporate Litigation Risk

Suing a corporate to court exposes to public an escalated level of unresolved disputes and conflicts between interested stakeholders of the corporation.A company being sued will have a range of problems,including explicit costs such as compensation,financing costs and hidden costs such as damage to the business environment.Driven by many serious consequences,companies will try to avoid being involved in lawsuits,so as not to damage their business environment or even put them in an existential crisis.China has always been built on a connected society,and in the business environment,the social connections of companies include social connection and political connection.The social connection among companies is formed by the board interlock,where the same person holds directorships in two or more companies at the same time,and the political connection is formed by the experience of directors in government or representative bodies.Based on panel data from China during 2008 and 2020,we constructs four social network centrality indicators for corporate boards based on board interlock by social network analysis method,and use dimension reduction toforms a unique indicator representing the board social connection due to the similar explanatory power of four indicators.At the same time,the political connection of board is represented by the experience of the directors who have worked or are currently working in the government,the National People’s Congress(NPC)or the Chinese People’s Political Consultative Conference(CPPCC),and the strength of their political connection is measured by assigning values according to the rank of the director’s work unit.Thus,this paper investigates how board social connection relationship and political connection interact to affect the company’s litigation risks.Overall speaking,the result shows that corporate litigation risks are effectively avoided if boards are better socially connected,which stay robust after we employ 2SLS,Difference-in-Difference and lagged models.We also found a significantly negative correlation between board political connection and corporate litigation risks,in which political connection from official increase corporate litigation risk while political connection from deputy decrease litigation risk.However there is a significantly positive coefficients of the interaction term of board social connection and political connection,and these empirical correlation is significant in non-state-owned enterprises rather than state-owned enterprises,which echoes prior studies that political connection provide firms with shield but hinder corporate governance,and political connection is much more crucial for private enterprises.