The Disciplinary Effects of Non-Debt Liabilities: Evidence from Asbestos Litigation
50 Pages Posted: 17 Mar 2010 Last revised: 14 Jan 2014
Date Written: August 15, 2013
I study firms with past asbestos ties that suffer from significant increases in legal liabilities after a U.S. Supreme Court ruling in 1999. This event provides a natural experiment setting to estimate the indirect effects of financial distress on real activities. While direct litigation and bankruptcy costs are significant, value computations and clinical evidence at the operational level show that defendant firms suffer only minor indirect costs of financial distress. Furthermore, these firms actively restructure and refocus on core operations during distress. Overall, my results provide support for potentially significant disciplinary effects of non-debt liabilities.
Keywords: Asbestos; Litigation; Natural experiment; Financial distress; Bankruptcy
JEL Classification: G32, G33
Suggested Citation: Suggested Citation