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The Effects of Product Liability Litigation on the Value of Firms

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  • David W. Prince
  • Paul H. Rubin

Abstract

We use event study methodology to examine the effects of product liability litigation on firms in the automobile and pharmaceutical industries. We find that the filing of a lawsuit, or news stories that subsequently lead to the filing of a lawsuit, is associated with significant losses in firm value. These losses are approximately equal to the upper bound of the direct loss in value of the firms involved. This means that there may also be some reputation effect from litigation events. We also find that in the automobile industry competitors lose when one firm is sued, but in the pharmaceutical industry a lawsuit against one firm leads to an increase in value of other firms. Copyright 2002, Oxford University Press.

Suggested Citation

  • David W. Prince & Paul H. Rubin, 2002. "The Effects of Product Liability Litigation on the Value of Firms," American Law and Economics Review, American Law and Economics Association, vol. 4(1), pages 44-87, January.
    • Handle: RePEc:oup:amlawe:v:4:y:2002:i:1:p:44-87
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    Cited by:

    1. Jochen Bigus, 2015. "Auditor Reputation Under Different Negligence Regimes," Abacus, Accounting Foundation, University of Sydney, vol. 51(3), pages 356-378, September.
    2. Azoulay, Pierre & Bonatti, Alessandro & Krieger, Joshua L., 2017. "The career effects of scandal: Evidence from scientific retractions," Research Policy, Elsevier, vol. 46(9), pages 1552-1569.
    3. Daniel Martin Katz & Michael J Bommarito II & Tyler Soellinger & James Ming Chen, 2015. "Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making," Papers 1508.05751, arXiv.org, revised May 2017.
    4. Bruce Mizrach & Susan Zhang Weerts, 2006. "Does The Stock Market Punish Corporate Malfeasance? A Case Study of Citigroup," Departmental Working Papers 200601, Rutgers University, Department of Economics.
    5. Maria De Paola & Vincenzo Scoppa, 2013. "Consumers’ Reactions to Negative Information on Product Quality: Evidence from Scanner Data," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(3), pages 235-280, May.
    6. Wang, Chun-Ju, 2010. "Research on non-market actions: A commentary essay," Journal of Business Research, Elsevier, vol. 63(8), pages 905-907, August.
    7. Paul Sergius Koku & Anique A. Qureshi, 2006. "Analysis of the effects of settlement of interfirm lawsuits," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 307-318.
    8. Davis, Yehuda & Govindaraj, Suresh & Suslava, Kate, 2024. "Does the stock market anticipate events and supreme court decisions in corporate cases?," Global Finance Journal, Elsevier, vol. 60(C).
    9. Lian Fen Lee & Amy P. Hutton & Susan Shu, 2015. "The Role of Social Media in the Capital Market: Evidence from Consumer Product Recalls," Journal of Accounting Research, Wiley Blackwell, vol. 53(2), pages 367-404, May.
    10. Palmer Michael & Sanders Thomas B., 2010. "Surprise! Most Blockbuster Jury Awards Are Ignored By The Stock Market," Review of Law & Economics, De Gruyter, vol. 6(2), pages 145-166, July.
    11. Barbos, Andrei & Hartman, John, 2023. "Reputational effects on third-party agents: A study of the market for fine and rare wines," Journal of Economic Behavior & Organization, Elsevier, vol. 208(C), pages 359-372.
    12. Eric Langlais & Andreea Cosnita-Langlais & Tim Friehe, 2024. "Product Liability Influences Incentives for Horizontal Mergers," EconomiX Working Papers 2024-10, University of Paris Nanterre, EconomiX.
    13. 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.
    14. DeLong, Gayle, 2018. "Can ‘delitigation’ transform an industry?," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 245-254.
    15. Baniak Andrzej & Grajzl Peter, 2013. "Equilibrium and Welfare in a Model of Torts with Industry Reputation Effects," Review of Law & Economics, De Gruyter, vol. 9(2), pages 265-302, October.
    16. Usero, Belén & Fernández, Zulima, 2009. "First come, first served: How market and non-market actions influence pioneer market share," Journal of Business Research, Elsevier, vol. 62(11), pages 1139-1145, November.
    17. Takaoka, Sumiko, 2004. "Verdicts and the value of the firm in Japan," Economics Letters, Elsevier, vol. 84(1), pages 93-97, July.
    18. Na-Eun Cho & Yue Maggie Zhou, 2021. "Profits, Reputation, and the Risk of Medical Malpractice Liability," Strategy Science, INFORMS, vol. 6(3), pages 228-243, September.
    19. Michael A. Wiles & Shailendra P. Jain & Saurabh Mishra & Charles Lindsey, 2010. "Stock Market Response to Regulatory Reports of Deceptive Advertising: The Moderating Effect of Omission Bias and Firm Reputation," Marketing Science, INFORMS, vol. 29(5), pages 828-845, 09-10.
    20. Zhang, Lu & Peng, Fei & Shan, Yuan George & Chen, Yiping, 2023. "CEO social capital and litigation risk," Finance Research Letters, Elsevier, vol. 51(C).
    21. Wen Wen & Chris Forman & Stuart J. H. Graham, 2013. "Research Note ---The Impact of Intellectual Property Rights Enforcement on Open Source Software Project Success," Information Systems Research, INFORMS, vol. 24(4), pages 1131-1146, December.
    22. Tobias Basse & Christoph Schwarzbach & J.-Matthias Schulenburg, 2023. "Dividend policy issues in the European pharmaceutical industry: new empirical evidence," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 24(5), pages 803-816, July.
    23. Sanjai Bhagat & Roberta Romano, "undated". "Event Studies and the Law--Part I: Technique and Corporate Litigation," Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series yale_lepp-1021, Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy.
    24. David Dranove & Subramaniam Ramanarayanan & Yasutora Watanabe, 2012. "Delivering Bad News: Market Responses to Negligence," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 1-25.

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