Journal of Financial and Quantitative Analysis

Table of Contents - February 2012 - Volume 47, Issue 01  

Research Articles

Financial Strength and Product Market Competition: Evidence from Asbestos Litigation

Charles J. Hadlocka1 and Ramana Sontia2

a1 Broad College of Business, Michigan State University, 315 Eppley Center, East Lansing, MI 48824. hadlock@msu.edu

a2 Indian School of Business, Gachibowli, Hyderabad 500 032, India. ramana_sonti@isb.edu

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 exogenous increases (decreases) in asbestos liabilities are interpreted by the market as negative (positive) news for a firm’s close competitors. These reactions are magnified in events in which one asbestos-tainted firm goes bankrupt and other asbestos-tainted stocks fall on the news of the bankruptcy. For smaller competitors, market reactions are more pronounced in more concentrated industries. Our findings support the general hypothesis that increases in fixed liabilities lead to more aggressive product market interactions.

Footnotes

Sonti gratefully acknowledges the assistance and hospitality provided by Southern Methodist University, where much work on this paper was done while he was temporarily in residence following Hurricane Katrina. We thank Heitor Almeida, Murillo Campello, Michael Gordy, Peter MacKay, Paul Malatesta (the editor), Jason Smith, Sheri Tice, and seminar participants at the University of Illinois, the University of Kentucky, and the Indian School of Business for helpful comments and suggestions. We owe special thanks to Sudipto Dasgupta (the referee) for suggestions that led to a substantially improved manuscript. All errors remain our own.