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Financial Strength and Product Market Competition: Evidence from Asbestos Litigation

Published online by Cambridge University Press:  16 December 2011

Charles J. Hadlock  and
Ramana Sonti
Charles J. Hadlock
Affiliation:
Broad College of Business, Michigan State University, 315 Eppley Center, East Lansing, MI 48824. [email protected]
Ramana Sonti
Affiliation:
Indian School of Business, Gachibowli, Hyderabad 500 032, India. [email protected]
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Abstract

We study the role of financial strength on product market competition by examining exogenous shocks to a firm’s liability structure arising from asbestos litigation. We find that exogenous increases (decreases) in asbestos liabilities are interpreted by the market as negative (positive) news for a firm’s close competitors. These reactions are magnified in events in which one asbestos-tainted firm goes bankrupt and other asbestos-tainted stocks fall on the news of the bankruptcy. For smaller competitors, market reactions are more pronounced in more concentrated industries. Our findings support the general hypothesis that increases in fixed liabilities lead to more aggressive product market interactions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 1 , February 2012 , pp. 179 - 211
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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