Thriving in the Midst of Financial Distress? An Analysis of Firms Exposed to Asbestos Litigation
Charles A. Dice Center Working Paper No. 2008-12
63 Pages Posted: 24 Jul 2008 Last revised: 27 Sep 2010
Date Written: July 1, 2008
I analyze a comprehensive sample of 270 defendant firms exposed to an unexpected wave of asbestos litigation in the wake of U.S. Supreme Court decisions in Amchem (1997) and Ortiz (1999). Due to insurance coverage and the strategic use of Chapter 11, most firms in the sample have manageable cash outflows and do not suffer materially from the litigation. Because of the long delay between exposure to asbestos and its related illnesses, the subset of firms with substantial legal cash outflows and liabilities provide a natural experiment to study financial distress unrelated to economic distress. When analyzing these firms throughout the distress period, I find little evidence of indirect costs of financial distress. Furthermore, I find empirical support for a significant disciplinary effect of financial distress as these firms actively restructure and refocus on core operations.
Keywords: asbestos litigation, exogenous shock, indirect costs of distress, Chapter 11
JEL Classification: G32, G33
Suggested Citation: Suggested Citation