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American Law and Economics Review V4 N1 2002 (44-87)
© 2002 American Law and Economics Association

Article

The Effects of Product Liability Litigation on the Value of Firms

David W. Prince and Paul H. Rubin

Emory University

Send correspondence to: David W. Prince, 6 Greene Street #4, New York, NY 10013; E-mail: davidprince{at} hotmail.com

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.


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