Journalof Regulato~Economics; 2:215-230 (1990) 9 Kluwer Academic Publishers The Market Response to Product Safety Litigation W. KIP VISCUSI Duke University Dept. of Economics, Durham, NC 27706 JONI HERSCH University of Wyoming Dept. of Economics, Lararaie, WY 82071 Abstract This paper examines the stock market impact of 29 product liability lawsuits reported in the Wall Street Journalfrom 1970-1985, an additional series of Agent Orange events, and a set of regulatory events involving product risks. If these events and the costs associated with them were fully anticipated, then there would be no effect on the stock market price. Adverse stock market effects increase if the event involves a product liability action, bodily injury, or a court decision. Lengthy newspaper coverage and initial reports also have a strong effect. If there are multiple defendants, the market cost per firm is reduced. One widely publicized "good news" event--the final Agent Orange decision--led to a dramatic increase in stock prices. 1. Introduction The major development of the past decade in society's efforts to control product risks has been the increased role of tort liability. Whereas direct ex ante government regulation formerly was the dominant influence, the rising stakes associated with product liability have created a supplementary form of ex post regulation through judicial sanctions. Indeed, in many instances f'Lrms have become more concerned with the ramifications of product regulations for their liability burden than they have been with the direct regulatory costs. The product liability crisis of the mid-1980's has been manifested in several dimensions. Insurance rates have risen, and in some cases coverage has been denied altogether. 1 The number of court cases has also escalated, as have total court awards. 2 If the economic costs associated ,_withthese claims are in fact consequential and alter the investor's expectations of the firm s profitability, they should be reflected in the firm's stock market prices.3 The main economic ingredient required to observe such effects is that there be an economic event that conveys new information to the stockholders that changes their assessed value of the firm. The focus of this paper will be on product safety lawsuits arising from both tort liability and regulatory violations and primarily on those events covered in the Wall Street Journal. This sample of events is not a random sample of lawsuits, as it is likely to consist of the more