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Growing Out of Trouble? Corporate Responses to Liability RiskTodd A. GormleyUniversity of Pennsylvania - The Wharton School David A. MatsaNorthwestern University - Kellogg School of Management December 30, 2010 Review of Financial Studies, Forthcoming 2009 Western Finance Association Conference Paper Abstract: This paper analyzes corporate responses to the liability risk arising from its workers’ exposure to newly identified carcinogens. We find that firms, especially those with weak balance sheets, tend to respond to such risks by acquiring large, unrelated businesses with relatively high operating cash flows. The diversifying growth appears to be primarily motivated by managers’ personal exposure to their firms’ risk in that the growth has negative announcement returns and is related to firms’ external governance, managerial stockholdings, and institutional ownership. The results suggest corporate governance is particularly important when firms are exposed to the risk of large, adverse shocks. Awarded CRA International Award for the Best Corporate Finance Paper, WFA 2009.
Number of Pages in PDF File: 65 Keywords: legal liability, acquisitions, payout policy, capital structure, managerial agency JEL Classification: D21, G32, G34, K13 Accepted Paper SeriesDate posted: April 16, 2009 ; Last revised: December 7, 2011Suggested CitationContact Information
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