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Growing Out of Trouble? Corporate Responses to Liability Risk


  • Todd A. Gormley
  • David A. Matsa


This article analyzes corporate responses to the liability risk arising from 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 that corporate governance is particularly important when firms are exposed to the risk of large, adverse shocks. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail:, Oxford University Press.

Suggested Citation

  • Todd A. Gormley & David A. Matsa, 2011. "Growing Out of Trouble? Corporate Responses to Liability Risk," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2781-2821.
  • Handle: RePEc:oup:rfinst:v:24:y:2011:i:8:p:2781-2821

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    Cited by:

    1. Keim, Donald B & Massa, Massimo & von Beschwitz, Bastian, 2015. "First to “Read” the News: News Analytics and Institutional Trading," CEPR Discussion Papers 10534, C.E.P.R. Discussion Papers.
    2. Peter Cziraki & Moqi Xu, 2014. "Ceo Job Security And Risk-Taking," FMG Discussion Papers dp729, Financial Markets Group.
    3. Bastian von Beschwitz & Donald B. Keim & Massimo Massa, 2018. "First to "Read" the News: New Analytics and Algorithmic Trading," International Finance Discussion Papers 1233, Board of Governors of the Federal Reserve System (U.S.).
    4. repec:eee:quaeco:v:67:y:2018:i:c:p:255-272 is not listed on IDEAS
    5. repec:spr:jecfin:v:41:y:2017:i:4:d:10.1007_s12197-016-9382-6 is not listed on IDEAS
    6. Bing Guo & David Pérez-Castrillo & Anna Toldrà-Simats, 2017. "Firms' Innovation Strategy under the Shadow of Analyst Coverage," CESifo Working Paper Series 6574, CESifo Group Munich.
    7. Volker Stein & Arnd Wiedemann, 2016. "Risk governance: conceptualization, tasks, and research agenda," Journal of Business Economics, Springer, vol. 86(8), pages 813-836, November.
    8. repec:eee:corfin:v:48:y:2018:i:c:p:169-186 is not listed on IDEAS
    9. Michal Gradzewicz, 2018. "What happens after an investment spike - investment events and firm performance," Working Papers 2018-040, Warsaw School of Economics, Collegium of Economic Analysis.
    10. Gormley, Todd A. & Matsa, David A. & Milbourn, Todd, 2013. "CEO compensation and corporate risk: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 79-101.
    11. Michaely, Roni & Popadak, Jillian & Vincent, Christopher, 2015. "The Deleveraging of U.S. Firms and Institutional Investors’ Role," MPRA Paper 66128, University Library of Munich, Germany.
    12. repec:eee:jfinec:v:128:y:2018:i:2:p:287-319 is not listed on IDEAS
    13. von Beschwitz, Bastian & Foos, Daniel, 2018. "Banks' equity stakes and lending: Evidence from a tax reform," Discussion Papers 06/2018, Deutsche Bundesbank.
    14. Gormley, Todd A. & Matsa, David A., 2016. "Playing it safe? Managerial preferences, risk, and agency conflicts," Journal of Financial Economics, Elsevier, vol. 122(3), pages 431-455.
    15. Favara, Giovanni & Morellec, Erwan & Schroth, Enrique & Valta, Philip, 2017. "Debt enforcement, investment, and risk taking across countries," Journal of Financial Economics, Elsevier, vol. 123(1), pages 22-41.
    16. repec:ibf:ijmmre:v:11:y:2018:i:1:p:1-17 is not listed on IDEAS
    17. repec:eee:jbfina:v:87:y:2018:i:c:p:202-215 is not listed on IDEAS
    18. Bastian von Beschwitz & Daniel Foos, 2016. "Banks' Equity Stakes and Lending : Evidence from a Tax Reform," International Finance Discussion Papers 1183, Board of Governors of the Federal Reserve System (U.S.).

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