Who Acquires Toxic Targets?

Abstract

We examine the consequences of environmental lawsuits in the market for corporate control. Using a sample of lawsuits filed in the U.S. federal courts, we document that environmental litigation reduces sued firms’ bidding activities during the subsequent three years. Purchasing targets that have been sued for environmental violations is value destroying for acquirers, as evidenced by their announcement‐date returns. Finally, firms with poor corporate governance are more likely to acquire such “toxic” targets. Our empirical results are robust to falsification tests using securities and contractual lawsuits, controlling for endogeneity using an instrumental variable approach, propensity score matching, employing an alternative lawsuit sample, and alternative control variables and model specifications. Our findings have significant implications for policymakers, corporate executives, and environmental interest groups.

Are environmental lawsuits related to the cost of bank loans?

“…However, no study has examined the relationship between environmental lawsuits and bank loan costs [2]. This is surprising because environmental lawsuits significantly affect firms' shareholders and stakeholders, including policy-makers, regulators and society (Liu and Yawson, 2018; Liu et al ., 2020).…”