Review of Financial Studies, 2011, 24(8), pp. 2781-2821.
2009 Western Finance Association Conference Paper
65 Pages Posted: 16 Apr 2009 Last revised: 17 Jun 2014
Date Written: December 30, 2010
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.
Keywords: legal liability, acquisitions, payout policy, capital structure, managerial agency
JEL Classification: D21, G32, G34, K13
Suggested Citation: 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, 2011, 24(8), pp. 2781-2821.; 2009 Western Finance Association Conference Paper. Available at SSRN: https://ssrn.com/abstract=1381829
By Alex Edmans