The wealth effects of corporate lawsuits: Pennzoil v. Texaco

The Pennzoil-Texaco lawsuit is a unique case that provides an excellent opportunity to study the impact of litigation on both the plaintiff and defendant. Market reaction to the lawsuit produces an asymmetrical effect on shareholder wealth. There is a large combined loss in market value resulting from the initial court decision, as much of Texaco's decline in wealth is not transferred to Pennzoil. However, anticipation of settlement causes a reversal of the effect. And, when measured over the entire lawsuit period, there is no evidence of a final loss in combined value. The asymmetric patterns indicate the presence of large transaction costs imposed upon Texaco as a result of the lawsuit and financial distress. There is a similar effect on bondholder wealth. In addition, it is hypothesized that the equity beta coefficient of both companies will be affected substantially during the lawsuit period. Pennzoil's beta declines significantly, and Texaco's beta rises significantly relative to the oil industry.