Financial Strength and Product Market Competition: Evidence from Asbestos Litigation

52 Pages Posted: 10 Apr 2009

See all articles by Charles J. Hadlock

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Ramana Sonti

Indian School of Business

Date Written: April, 10 2009

Abstract

We study the role of financial strength on product market competition by examining exogenous shocks to a firm's liability structure arising from asbestos litigation. We find that unexpected exogenous increases (decreases) in a firm's asbestos liabilities arising from actions by external parties are interpreted by the market as negative (positive) news for the firm's close competitors. Since asbestos liabilities are debt-like claims, these findings support the hypothesis that increases in fixed liabilities lead to more aggressive competitive interactions. Competitor returns are particularly negative in events in which one asbestos-tainted firm goes bankrupt and other asbestos stocks fall on the news, suggesting that non-equity liabilities affect a firm's product market decisions by causing them to discount default states of the world. The magnitude of the response of competitor stocks to asbestos liability shocks is not related to most of the firm and industry characteristics we consider, casting doubt on some possible explanations for our findings.

Keywords: financial strength, debt, product market competition, asbestos liabilities

JEL Classification: G32, L13

Suggested Citation

Hadlock, Charles J. and Sonti, Ramana, Financial Strength and Product Market Competition: Evidence from Asbestos Litigation (April, 10 2009). Available at SSRN: https://ssrn.com/abstract=1376267 or http://dx.doi.org/10.2139/ssrn.1376267

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

315 Eppley Center
East Lansing, MI 48824-1121
United States
517-353-9330 (Phone)
517-432-1080 (Fax)

Ramana Sonti (Contact Author)

Indian School of Business ( email )

Gachibowli
Hyderabad, Andhra Pradesh 500 019
India
914023187103 (Phone)

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