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Wealth Creation and Destruction from Brooke Group's Tobacco Litigation Strategy

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  • Sandeep Dahiya
  • David Yermack

Abstract

We examine value creation and destruction in the tobacco industry due to the radical litigation strategy pursued by Brooke Group and its CEO, Bennett LeBow. Brooke Group has a tiny market share, low margins, high leverage, and a high concentration of management ownership.Beginning in 1996 the firm reached settlements in lawsuits brought against all cigarette companies by class action plaintiffs and U.S. state governments. Brooke Group's actions, which included promises to cooperate in litigation against its rivals, spurred other companies to reach settlements on less favorable terms. The settlements eventually led to massive wealth destruction within the tobacco industry but impressive returns for shareholders of Brooke Group.

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Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-050.

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Date of creation: Dec 1999
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Handle: RePEc:fth:nystfi:99-050

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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
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  1. Reinganum, Jennifer F, 1988. "Plea Bargaining and Prosecutorial Discretion," American Economic Review, American Economic Association, vol. 78(4), pages 713-28, September.
  2. Andrei Shleifer & Lawrence H. Summers, 1987. "Breach of Trust in Hostile Takeovers," NBER Working Papers 2342, National Bureau of Economic Research, Inc.
  3. Bruce H. Kobayashi, 1992. "Deterrence with Multiple Defendants: An Explanation for "Unfair" Plea Bargains," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 507-517, Winter.
  4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  5. Paul Klemperer & Jeremy Bulow, 1998. "The Tobacco Deal," Economics Series Working Papers 1999-W11, University of Oxford, Department of Economics.
  6. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  7. John, Kose, 1987. " Risk-Shifting Incentives and Signalling through Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 42(3), pages 623-41, July.
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