This study examines the moderating role of corporate governance in the relationship between litigation risk and corporate innovation, while also investigating the association between financial constraints and litigation risk among firms listed on the Tehran Stock Exchange. The research is applied in purpose and descriptive-correlational in method. The statistical population comprises all firms listed on the Tehran Stock Exchange during the period 2018–2023. After applying systematic screening criteria, a final sample of 120 firms (720 firm-year observations) was selected. Data were extracted from audited financial statements and the Codal database and analyzed using multivariate linear regression models with firm and year fixed effects. The empirical results indicate that litigation risk has a significant negative effect on corporate innovation. Corporate governance positively moderates this relationship, attenuating the adverse impact of litigation risk on innovative activities. In addition, financial constraints—proxied by the Altman Z-Score—exhibit a significant positive association with litigation risk, suggesting that firms with stronger financial positions experience higher litigation exposure in the Iranian context, possibly due to greater visibility and regulatory scrutiny. These findings remain robust after controlling for firm-specific characteristics (size, profitability, leverage, age, ownership concentration, market competition, capital expenditure, Tobin’s Q, and sales) as well as macroeconomic factors (inflation and GDP growth). The results underscore the strategic importance of strong corporate governance mechanisms in safeguarding firms’ innovative capacity against legal uncertainties. The study offers practical implications for corporate managers, capital-market regulators, and policymakers seeking to enhance governance quality, mitigate litigation-related risks, and foster sustainable innovation within the Iranian capital market.