The Costs of Conflict Resolution and Financial Distress: Evidence from the Texaco-Pennzoil Litigation

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.