Growing Out of Trouble? Corporate Responses to Liability Risk

Gormley, Todd A.; Matsa, David A.

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Growing Out of Trouble? Corporate Responses to Liability Risk

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

See all articles by Todd A. Gormley

Todd A. Gormley

Washington University in St. Louis; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

David A. Matsa

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Date Written: December 30, 2010

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.

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