Title: Growing Out of Trouble? Legal Liability and Corporate Responses to Adversity *
Abstract: This paper uses exogenous increases in legal liability to analyze the importance of agency conflicts arising from managers’ exposure to firm risk. We measure how a typical firm responds when a chemical to which its workers are exposed is newly identified to be a carcinogen. While there is no evidence of a pre‐existing trend, we find that firms, particularly those with weak balance sheets, tend to undertake aggressive growth and increased acquisitions after experiencing the liability shock. The acquisitions appear to be targeted at diversifying the firms’ assets by acquiring large businesses with relatively high operating cash flows, recent growth, and total payouts. These deals are associated with high takeover premiums and negative abnormal returns. These findings fit well with a managerial agency model. In support of the agency model, we find that total assets grow most among firms with weak external governance, high management ownership, or low institutional ownership. The results suggest that agency conflicts may be exacerbated when firms are closer to financial distress.
Publication Year: 2009
Publication Date: 2009-01-01
Language: en
Type: article
Access and Citation
Cited By Count: 10
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot