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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 article demonstrates that the dispute between Texaco and Pennzoil over the Getty Oil takeover reduced the combined wealth of the claimants on the two companies by over $3 billion. During the course of the litigation, Pennzoil's shareholders gained only one-sixth as much as Texaco's shareholders lost. When the litigation was settled, about two-thirds of the loss in wealth was regained. These fluctuations in value exceed most estimates of the direct costs of carrying on the litigation, and may reflect the disruption in the operations of Texaco caused by the dispute.

Suggested Citation

  • David M. Cutler & Lawrence H. Summers, 1988. "The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 157-172, Summer.
  • Handle: RePEc:rje:randje:v:19:y:1988:i:summer:p:157-172
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    Cited by:

    1. Lucian Arye Bebchuk, 1998. "Chapter 11," NBER Working Papers 6473, National Bureau of Economic Research, Inc.
    2. Bebchuk, Lucian Arye, 2000. "Using options to divide value in corporate bankruptcy," European Economic Review, Elsevier, vol. 44(4-6), pages 829-843, May.
    3. Mark Gertler & R. Glenn Hubbard, 1990. "Taxation, Corporate Capital Structure, and Financial Distress," NBER Chapters,in: Tax Policy and the Economy: Volume 4, pages 43-72 National Bureau of Economic Research, Inc.
    4. Chirinko, Robert S., 1997. "Finance Constraints, Liquidity, and Investment Spending: Theoretical Restrictions and International Evidence," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 185-207, June.
    5. Veronesi, Pietro & Zingales, Luigi, 2010. "Paulson's gift," Journal of Financial Economics, Elsevier, vol. 97(3), pages 339-368, September.
    6. Douglas W. Elmendorf, "undated". "The Effect of Deficit-Reduction Laws on Real Interest Rates," Finance and Economics Discussion Series 1996-44, Board of Governors of the Federal Reserve System (U.S.).
    7. Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 33-78.
    8. Oliver Hart & John Moore, 1990. "A Theory of Corporate Financial Structure Based on the Seniority of Claims," STICERD - Theoretical Economics Paper Series 217, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    9. repec:eee:jfinec:v:129:y:2018:i:2:p:228-249 is not listed on IDEAS
    10. Bebchuk, Lucian Ayre & Chang, Howard F, 1992. "Bargaining and the Division of Value in Corporate Reorganization," Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 253-279, April.
    11. Aharony, Joseph & Liu, Chelsea & Yawson, Alfred, 2015. "Corporate litigation and executive turnover," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 268-292.
    12. Michael Firth & Oliver M. Rui & Wenfeng Wu, 2011. "The Effects of Political Connections and State Ownership on Corporate Litigation in China," Journal of Law and Economics, University of Chicago Press, vol. 54(3), pages 573-607.
    13. repec:eur:ejisjr:185 is not listed on IDEAS
    14. John Armour & B.R. Cheffins & D.A. Skeel Jr., 2002. "Corporate Ownership Structure and the Evolution of Bankruptcy Law in the US and UK," Working Papers wp226, Centre for Business Research, University of Cambridge.
    15. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
    16. Lucian Arye Bebchuk, 2002. "Ex Ante Costs of Violating Absolute Priority in Bankruptcy," Journal of Finance, American Finance Association, vol. 57(1), pages 445-460, February.
    17. Utpal Bhattacharya & Neal Galpin & Bruce Haslem, 2007. "The Home Court Advantage in International Corporate Litigation," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 625-660.
    18. Taillard, Jerome Ph. A., 2008. "Thriving in the Midst of Financial Distress? An Analysis of Firms Exposed to Abestos Litigation," Working Paper Series 2008-12, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    19. Taillard, Jérôme P., 2013. "The disciplinary effects of non-debt liabilities: Evidence from asbestos litigation," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 267-293.
    20. Bittlingmayer, George & Hazlett, Thomas W., 2000. "DOS Kapital: Has antitrust action against Microsoft created value in the computer industry?," Journal of Financial Economics, Elsevier, vol. 55(3), pages 329-359, March.
    21. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
    22. Hertzel, Michael G. & Li, Zhi & Officer, Micah S. & Rodgers, Kimberly J., 2008. "Inter-firm linkages and the wealth effects of financial distress along the supply chain," Journal of Financial Economics, Elsevier, vol. 87(2), pages 374-387, February.
    23. Korkeamäki, Timo & Takalo, Tuomas, 2010. "Valuation of innovation: The case of iPhone," MPRA Paper 28042, University Library of Munich, Germany.
    24. Bhamra, Harjoat S. & Fisher, Adlai J. & Kuehn, Lars-Alexander, 2011. "Monetary policy and corporate default," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 480-494.
    25. Hwang, Dar-Yeh & Shie, Fu-Shuen & Wang, Kehluh & Lin, Jung-Chu, 2009. "The pricing of deposit insurance considering bankruptcy costs and closure policies," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1909-1919, October.

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