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Cited by 690Corporate Finance and GovernanceAuditing, Earnings Management, GovernanceRisk Management in Financial Firms

Growing out of trouble? Corporate responses to liability risk

Open access
Gormley, Todd A., Matsa, David A.·2011·Review of Financial Studies
DOI 10.1093/rfs/hhr011
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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.

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Registry

Crossref · 10.1093/rfs/hhr011

Cites

80 of 80 references verified0 citation errors · 0 not checkable

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Claims the paper makes

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  • Each alternative estimator ensures that firms receiving treatment are not compared to those that previously received it.

    “For example, each alternative estimator ensures that firms receiving treatment are not compared to those that previously received it.”

    From How Much Should We Trust Staggered Difference-in-Differences Estimates? (2022) · cites this paper as Gormley and Matsa, 2011

    The Empirical approach section (page unavailable) says the paper compares exposed firms with unaffected firms lacking observed exposure to newly listed carcinogens. That supports the point that its comparison group excludes previously exposed firms, but the paper does not establish that *each alternative estimator* has this property. (LLM, conf=0.82)

    Experimental — accuracy not yet measured

  • The methods differ in which observations are used as effective comparison units and how covariates are incorporated.

    “However, the methods differ in which observations are used as effective com parison units and how covariates are incorporated.”

    From How Much Should We Trust Staggered Difference-in-Differences Estimates? (2022) · cites this paper as Gormley and Matsa, 2011

    Section 3 (Empirical approach; page unavailable) describes alternative comparison groups and explains why the main regressions omit time-varying accounting controls. It therefore supports both methodological dimensions, but does not directly make the broader claim that the methods under discussion differ along them. (LLM, conf=0.76)

    Experimental — accuracy not yet measured

  • Stacked regression is an alternative approach developed by applied researchers for circumventing the issues with TWFE DiD estimators.

    “An alternative approach developed by applied researchers for circumventing the issues with TWFE DiD estimators is a “stacked regression” (see, e.g., Gormley and Matsa, 2011; Cengiz et al., 2019; Deshpande and Li, 2019 ).”

    From How Much Should We Trust Staggered Difference-in-Differences Estimates? (2022) · cites this paper as Gormley and Matsa, 2011

  • The proposed solutions all deal with the biases arising from the 'bad comparisons' problem by modifying the set of effective comparison units.

    “While the literature has not settled on a standard, the proposed solutions all deal with the biases arising from the”

    From How Much Should We Trust Staggered Difference-in-Differences Estimates? (2022) · cites this paper as Gormley and Matsa, 2011

    Section 3, “Empirical approach,” describes how this study selects unaffected firms as a comparison group and checks alternative group definitions. It does not discuss a general ‘bad comparisons’ problem or say that proposed solutions all work by modifying effective comparison units. Searches for those terms and close paraphrases found no passage addressing that claim. (LLM, conf=0.76)

    Experimental — accuracy not yet measured

Self-check

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Cites

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Research works printed but not linked: 2

  1. [7]7. Blanchard, Olivier Jean, Florencio Lopez de Silanes, and Andrei Shleifer. 1994. "What Do Firms Do with Cash Windfalls?" Journal of Financial Economics, 36(3): 337-60.
  2. [25]25. LeRoy, Spencer, Richard N. Golding, Salvatore A. Barbatano, Kirk A. Borchardt, James H. M. Sprayregen, and JoAnn M. Hornak. 1989. "Workers' Compensation in Bankruptcy: How Do the Parties Fare?" Tort & Insurance Law Journal, 24: 593-629.

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Related

Authors
Gormley, T. A., & Matsa, D. A.
Affiliations
  • Washington University in St. Louis (US)
  • Northwestern University (US)
ORCID
Gormley, Todd A.
Venue
Review of Financial Studies
Publisher
Oxford University Press (OUP)
Published
2011-04-11
Volume
24
Issue
8
Pages
2781-2821
ISSN
  • 0893-9454 (ISSN-L)
  • 1465-7368
DOI
10.1093/rfs/hhr011
OpenAlex
W2137816507
Cited by
690
References
75
Citations by year
2026: 90 · 2025: 136 · 2024: 113 · 2023: 70 · 2022: 56 · 2021: 59 · 2020: 39 · 2019: 21 · 2018: 27 · 2017: 24 · 2016: 19 · 2015: 10 · 2014: 7 · 2013: 13 · 2012: 4
FWCI
28.37
Type
journal article
Language
en
Open access
Locations
  • Review of Financial Studies (publishedVersion)
  • ScholarlyCommons (University of Pennsylvania) (submittedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
Topics
  • Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
  • Social Sciences › Business, Management and Accounting › Accounting › Auditing, Earnings Management, Governance
  • Social Sciences › Business, Management and Accounting › Accounting › Risk Management in Financial Firms
Keywords
liability risk, carcinogens, business diversification, unrelated acquisitions, corporate governance, institutional ownership, operating cash flow, balance sheet strength, adverse shocks

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