Abstract/Summary

This study examines the impact of foreign ownership on a firm’s litigation risk. Drawing on corporate governance and signaling perspectives, we propose that foreign ownership functions as a monitoring mechanism, enhancing corporate governance, while also signaling to potential litigants that the focal firm may be more costly and challenging to litigate against. Therefore, foreign ownership helps mitigate litigation risk. Importantly, we emphasize the heterogeneity of foreign ownership by distinguishing between foreign institutional and corporate ownership, as well as considering the country of origin of foreign investors. Additionally, we find that a firm’s analyst coverage and outward internationalization can substitute for the impact of foreign ownership. These findings contribute to international business and corporate litigation literature by unpacking the deterrent effect of foreign ownership on litigation risk.