Working Paper: NBER ID: w2418
Authors: David M. Cutler; Lawrence H. Summers
Abstract: 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.
Keywords: litigation; financial distress; Texaco; Pennzoil; conflict resolution
JEL Codes: G34; K41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ongoing litigation (K41) | Significant losses for Texaco's shareholders (G33) |
| Ongoing litigation (K41) | Significant losses for Pennzoil's shareholders (G33) |
| Ongoing litigation (K41) | Reduction in combined equity value (G32) |
| High legal fees (K41) | Loss in value (D46) |
| Financial distress (G33) | Operational disruptions (L93) |
| Financial distress (G33) | Difficulties in obtaining credit (G21) |
| Operational disruptions (L93) | Impairment of productivity (D24) |
| Costs of financial distress (G33) | Broader implications for economic analysis (F69) |