Growing Out of Trouble? Corporate Responses to Liability Risk

Abstract

This article analyzes corporate responses to the liability risk arising from workers' exposure to newly identified carcinogens. We find that firms, especially those with weak balance sheets, tend to respond to such risks by acquiring large, unrelated businesses with relatively high operating cash flows. The diversifying growth appears to be primarily motivated by managers' personal exposure to their firms' risk in that the growth has negative announcement returns and is related to firms' external governance, managerial stockholdings, and institutional ownership. The results suggest that corporate governance is particularly important when firms are exposed to the risk of large, adverse shocks.