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


  • David M. Cutler
  • Lawrence H. Summers


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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  • David M. Cutler & Lawrence H. Summers, 1987. "The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation," NBER Working Papers 2418, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2418
    Note: ME PE

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    References listed on IDEAS

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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. 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.
    10. Aharony, Joseph & Liu, Chelsea & Yawson, Alfred, 2015. "Corporate litigation and executive turnover," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 268-292.
    11. 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.
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    13. 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.
    14. 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.
    15. 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.
    16. 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.
    17. 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.
    18. 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.
    19. 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.
    20. 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.
    21. 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.
    22. Korkeamäki, Timo & Takalo, Tuomas, 2010. "Valuation of innovation: The case of iPhone," MPRA Paper 28042, University Library of Munich, Germany.
    23. 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.
    24. 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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