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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.

Suggested Citation

  • Sandeep Dahiya & David Yermack, 1999. "Wealth Creation and Destruction from Brooke Group's Tobacco Litigation Strategy," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-050, New York University, Leonard N. Stern School of Business-.
  • Handle: RePEc:fth:nystfi:99-050
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    File URL: http://www.stern.nyu.edu/fin/workpapers/papers99/wpa99050.pdf
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    References listed on IDEAS

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    1. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    2. John, Kose, 1987. " Risk-Shifting Incentives and Signalling through Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 42(3), pages 623-641, July.
    3. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters,in: Corporate Takeovers: Causes and Consequences, pages 33-68 National Bureau of Economic Research, Inc.
    4. Reinganum, Jennifer F, 1988. "Plea Bargaining and Prosecutorial Discretion," American Economic Review, American Economic Association, vol. 78(4), pages 713-728, September.
    5. 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.
    6. 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.
    7. Jeremy Bulow & Paul Klemperer, 1998. "The Tobacco Deal," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998 Micr), pages 323-394.
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