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The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation

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  • David M. Cutler
  • Lawrence H. Summers

Abstract

This paper uses data on the abnormal returns earned by the shareholders of Texaco and Pennzoil to examine whether resources were "lost" in the course of the litigation. We find that the leakage involved in the forced transfer is enormous: each dollar of value lost by Texaco's shareholders has been matched by only about 30 cents gain to the owners of Pennzoil. Our estimates suggest that the Texaco-Pennzoil conflict has reduced the combined equity value of the two companies by about $2 billion. Further losses have been suffered by Texaco's bondholders, though these may be offset by the tax collections that would result if Texaco made a large payment to Pennzoil.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2418.

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Date of creation: Oct 1987
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Publication status: published as Rand Journal of Economics, Vol. 19, No. 2, pp. 157-172, (Summer 1988).
Handle: RePEc:nbr:nberwo:2418

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  1. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  2. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  3. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  4. Schwert, G William, 1981. "Using Financial Data to Measure Effects of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 121-58, April.
  5. Bruce Greenwald & Joseph E. Stiglitz, 1987. "Money, Imperfect Information and Economic Fluctuations," NBER Working Papers 2188, National Bureau of Economic Research, Inc.
  6. Jeffrey Sachs & Harry Huizinga, 1987. "U.S. Commercial Banks and the Developing Country Debt Crisis," NBER Working Papers 2455, National Bureau of Economic Research, Inc.
  7. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
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  1. CDS zero net supply
    by Robert in angry bear on 2008-11-06 23:44:00
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