Abstract

http://ssrn.com/abstract=1381829
 
 

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Growing Out of Trouble? Corporate Responses to Liability Risk


Todd A. Gormley


University of Pennsylvania - The Wharton School

David A. Matsa


Northwestern 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 Series


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Date posted: April 16, 2009 ; Last revised: July 11, 2013

Suggested Citation

Gormley, Todd A. and Matsa, David A., Growing Out of Trouble? Corporate Responses to Liability Risk (December 30, 2010). Review of Financial Studies, Forthcoming; 2009 Western Finance Association Conference Paper. Available at SSRN: http://ssrn.com/abstract=1381829

Contact Information

Todd A. Gormley (Contact Author)
University of Pennsylvania - The Wharton School ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(314) 313-4330 (Phone)
HOME PAGE: http://apps.olin.wustl.edu/faculty/Gormley/

David A. Matsa
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)
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