University of Illinois Urbana-Champaign

Tort Liability Standards and the Firm's Response to Regulation

Moreschi, Robert William

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Description

Title
Tort Liability Standards and the Firm's Response to Regulation
Author(s)
Moreschi, Robert William
Issue Date
1988
Doctoral Committee Chair(s)
Ulen, Thomas S.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
  • Law
  • Economics, Commerce-Business
  • Economics, Finance
Abstract
  • Much of the recent regulation literature is concerned with the impact of regulation on the value of firms. Previous research has indicated that regulation can be either beneficial or harmful to firms. Increasingly, financial models using an event study methodology are used to measure the effects of regulation on firm value.
  • The focus of this thesis was on the effect the cost of compliance with environmental regulation has on the value and investment risk of firms. Environmental regulation has been traditionally considered a negative factor. The firm is assumed to face a mandatory emissions standard. A firm's response to a standard was modeled using an economic theory of torts, specifically negligence. Under a negligence rule, a firm may be held liable for compensatory damages if found negligent of the required level of control (pollution reduction). The firm chooses the level of control that equates the marginal private cost of control with the marginal expected noncompliance penalty. This choice may not satisfy the standard.
  • The model was used to investigate the following questions. Though compliance measures are a positive cost, is the net effect of regulation on firm value positive, negative, or zero? Does investment in a firm become more or less risky after promulgation of a regulation? Finally, does the effect of regulation on a firm vary with a change in enforcement measures? That is, does a court decision adverse to a firm produce more significant effects relative to enforcement by the regulatory authority?
  • The firms of the paper industry were used for the empirical testing. These firms were subject to the strict mandates of the Federal Water Pollution Control Act of 1972. Test results were generated using firm security returns with an intervention analysis methodology. Parametric t-tests of excess risk-adjusted returns and systematic risk shifts were calculated at the portfolio and firm level. In addition, a nonparametric Wilcoxon matched-pairs test on systematic risk shifts was also developed. The results supported the hypothesis that firms were affected differentially, but adverse court decisions apparently do not produce more significant impacts.
Graduation Semester
1988
Type of Resource
text
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http://hdl.handle.net/2142/70806

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