FIN-01-047

Litigation Exposure, Capital Structure, and Shareholder Value: The Case of Brooke Group

August 2001

Sandeep Dahiya and David Yermack

ABSTRACT

We examine value creation and destruction in the tobacco industry due to the radical litigation strategy of Brooke Group CEO Bennett LeBow. Brooke Group had tiny market share, low margins, high leverage, and highly concentrated management ownership. Beginning in 1996 the firm reached settlements in lawsuits brought against all cigarette companies by class action plaintiffs and U.S. state governments. Brooke Group’s actions, which included promises to cooperate in litigation against its rivals, spurred other companies to reach settlements on less favorable terms. These events led to massive wealth destruction within the industry but impressive returns for shareholders of Brooke Group.

Classification: G32

Sandeep Dahiya
Institution: Department of Finance at McDonough School of Business, Georgetown University 37th and O Streets, NW, Washington, DC 20057
Telephone: (202) 687-3832
Fax: (202) 687-4031
Email: sd@msb.edu

David Yermack
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0357
Fax: (212) 995-4220
Email: dyermack@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~dyermack

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