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Thriving in the Midst of Financial Distress? An Analysis of Firms Exposed to Abestos Litigation

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  • Taillard, Jerome Ph. A.

    (Ohio State U)

Abstract

Asbestos litigation is one of the most important mass tort litigations in the history of the United States. I analyze a comprehensive sample of 270 firms that were exposed to an unprecedented wave of asbestos litigation in the wake of U.S. Supreme Court decisions in Amchem (1997) and Ortiz (1999). Due to insurance coverage, most firms in the sample have manageable cash outflows and do not suffer materially from the litigation. Because of the long delay between exposure to asbestos and its related illnesses, the remaining firms with substantial cash outflows and liabilities offer a rare natural experiment to study financial distress unrelated to economic distress. When analyzing this sub-sample throughout the distress period, I find little evidence of indirect costs of financial distress. This surprising result can be directly related to the strategic use of Chapter 11 as it provides a safe harbor through the stay in litigation and the "channeling injunction", which allows for a definitive solution for the legal liabilities. There is also evidence of a positive role for the disciplinary effects of financial distress as firms subject to increased bank monitoring and increased legal liabilities actively restructure and refocus on core operations.

Suggested Citation

  • 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.
  • Handle: RePEc:ecl:ohidic:2008-12
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    File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2008/2008-12.pdf
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    References listed on IDEAS

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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